Financial Statement ; 2) Balance sheet ; Equity

Hello everyone,


This is going to be the last post that covers balance sheets and it will be about equity.
Broadly speaking equity is what is left after all the liabilities are covered by assets , i.e.
Equity = Assets - Liabilities

Let's go on to the first balance sheet:

We are again looking at HERO. I would say that the first four are not that representative and most of the times they will miss from the balance sheets. Simply ,they represent (the original value of each share)x(shares outstanding ).Just it would be good to say what shares outstanding is : these are all the assets of the people who are authorised with ownership of the actual company. It is good to point out that the  number of those outstanding shares will vary over time causing the so-called dilution. An example of that would be a hypothetical company A that initially issues 1000 outstanding shares for its owners. However , under some circumstances there are new 500 outstanding shares issued making the old 1000 less valuable. So, dilution makes the existing shares less valuable. At this point, if owner A had 200 outstanding shares , this means that he used to have 20% of the company , however, with the additional 500 shares now he has 200/1500=13,3 %, so in order to protect his ownership he may buy more outstanding shares. It is not like a fixed rule that owners follow , but again movements in the shareholder's equity affect the share price. That is why we also look at insider's transactions.
As you have already noted, insiders also want to make profit out of buying shares at low price and selling at higher price. Last time I was asked , whether the knowledge that the insiders have could make them buy and sell whenever they want. Well, they could do that but this will change substantially the outline of the graph. Imagine what would happen if all insiders start to sell their common shares, this would create excess supply of shares making the price per share lower. The owners will sell in large volumes making the stock extremely volatile , BUT this would scare the potential investors. Would you invest in a really volatile stock? Each company has interest to attract more investors , not to scare them . If the share price changes because insiders are playing around this in the long run would leave the owners without outside investors. (Note: there is difference between common and outstanding shares . The formal is referring to the public shareholders, whereas , the latter is about ownership division.

Going back to equity:
1) Retained earnings- these are the profits that a company has accumulated throughout the years , but were supposed to be paid as dividend to the investors . This number can actually give you some idea of how is the company operating with its disposable income . In order to explain it better ,we need the formula for it and it is accumulated:
Retained Earnings (RE)= Beginning RE + Net profit - Dividend
So , from this formula you can see that what is accumulated in the second period is dependable on the first period RE . Obviously , if a company pays dividend , it is left with less disposable income . Sometimes the firm will prefer not to spend a lot of money on dividends payment and it will instead invest .
2) Treasury stock - Treasury stock is related to share buybacks as it states, what was the cost of this program ( has to be negative and can tell us that management wants to drive the price up). These stocks are hold in treasuries and they do not pay dividend. Most of the times you will see small numbers but there is something that I want to share that can help. I will give you some intuition ... Imagine there are 1000 shares that are traded publicly. If one of the owners take 200 of these shares out of the circulation and put them in the treasuries. What will happen is that this will increase the value of the 800 outstanding shares left. So, if you spot some large movements in Treasury stock  this could be a sign of an increase in the price.
3) Capital Surplus - It refers to all the capital left after taking the retained earnings. A good example of that would if the government sponsors a new business to grow faster. So , this profit is not included in the retained earnings i.e. it is coming from an outside party.
Tangible assets are all the assets that a company has excluding e.g. brand name, customer base, customs, ads,etc.

These are the most important things to note about company's equity. This was the last post on Balance sheet.

• Do not forget to check out this link, which is a list of all public companies. It shows how many traded shares there are for each firm  http://www.watchingstock.com/

Financial statement ; 2) Balance sheet ; liabilities

Last post was about current and long term assets, this time I will look at liabilities that can also be found on the balance sheets of the companies. 

Liabilities are all the obligations, loans, etc. that one party owes to another. For example these obligations could be money, goods or services.

Here is the first balance sheet we will look at ( Hercules Offshore ticker: HERO) : 

Just to remind, you can always check out the balance sheets of most of the companies on finance.yahoo.com on "Balance sheet" section. 

So,as you most probably have noted, each company will have short term and long term liabilities. Each company will plan when it is going to clear those liabilities in the future and it is going to split them depending on the nature of each obligation. We can look at the different group separately:

1) Account payable - last time we covered net receivables which is closely related to account payables. If a consumer can consume e.g. company's goods and not paying for them at the moment of the consumption then the opposite thing could happen as well . In other words , the company's managers may use the someone's inventory and not paying for it at the moment of consumption. This obligation will be recorded on the balance sheet as Account Payable .

  You can always check out whether the company owes money or whether it has more obligations. Our example with HERO you can make a comparison between the quarter 31.12.2013 and 30.09.2013 and you can see that 231,015-194,585= 36,480 and 187,812-203,419=-15,607 , which shows  that the company has increased its net receivables (assets) and at the same time it has decreased its account payables (liabilities)

2) Short/Current Long Term Debt - this is where the loans from banks are going to be included. It is called Current Long Term Debt because although companies are going to pay those loans within a year , most of the times there is a residual part of long term deficit that is accumulated as debt .

Generally speaking , current liabilities are to be paid within one year. If the number in the section "Other current liabilities" is relatively too large and you are interested to see what is "hiding" behind it, you can research it on the company's 10K and sometimes you can find something helpful on the so-called 8K ( this is a report on events that has happened on the last fiscal year- it could be bankruptcy, acquisition ,etc. 

Long term liabilities :

3) Long term debt - debt accumulated throughout the years. Going back to the example with HERO , you can see that something happened after the 30.06.2013 quarter. I checked out its quick and current ratio ; its debt/equity ratios as well on finviz.com :

Quick Ratio	2,40
Current Ratio	2,40
Debt/Eq	1,33
LT Debt/Eq	1,31

You can conclude that despite the good numbers at current and quick ratio , there could be serious problems in the long term with this company because of Debt/Eq=1,33 . This means that this company has a larger debt than its actual equity (Equity=Assets-Liabilities). But in the short term is doing well ( you can see that from the current and quick ratio).

4) Minority interest - Refers to acquisition of either an investor or another company. The ownership of the new holder will be less than 50% which implies that this party do not control the company (it has to be more than 51% in order to be owner of the company.).

These were the indicators about liabilities that you will find on most balance sheets . I just wanted to make one last point for HERO since we are talking about it :

This is what you should know about liabilities. Next time I will look for explanation about equity and this will be the last part for balance sheets. 

Plamen Filipov

Surrey Investing Society

Financial statement ; 2) Balance Sheets ; assets

Hi everyone ,

Last time I was discussing the first type of Financial Statements, which as income statement and now we will look at balance sheets, in particular assets why they tell us so much information.(This is the first part for Balance sheets covering only assets) 

In one of the previous sessions Christopher Pittas , he defined for you what a balance sheet represents . Just a brief recap:

"A balance sheet is an annual list of a firms assets , liabilities and its overall equity"

1)Assets-the total amount of value that a company has  ( it could be in form of cash,inventory, bonds,etc. , pretty much everything that is valued by other parties with certain prize ) 

2) Liabilities- Debt , interest payment,salaries ,etc. - clearly things that the e.g. company's managers use for business development but its their own present property .

3)Equity is simply the the difference between the two.Note that I said the difference between the two because, shareholders equity can be both positive and negative.

Imagine that you have a company . How would organize your company? Do you think it is a good idea to invest all of your money in one thing and waiting for "success" ? What if something comes up and you cannot provide liquidity? For example, you need more capital in order to increase your output just because you found a new market , that you cannot supply , just because you have already invested all your money in one thing ( such as machinery ,etc. ). It gets messy, right?

That is why clever managers have planned the so-called short term (current) and long term assets.

Let's look at the first balance sheet , to give you some intuition about it :
We are looking at Juniper Network (JNPR ) :

We will look at the different indicators separately. We are looking at the balance sheet of  Juniper Networks Ticker (JNPR) ( Network and communication services ; USA ). Cash and cash equivalent would obviously be the most liquid assets because they can use them whenever they want. OK, so what you can do at this point is to see what is going on with this sector because obviously this company is holding a lot of cash- you may ask yourself : '' Is it because of the industry or is it because the company has some future plan about acquisition or new product that will be launched on the market. It would be a good idea to see what is happening with other companies in this industry ( P.S. you can always check out that, going to section ''Competitors that is on the official site of finance.yahoo.com ) Let's look at some of its competitors :

Competitor 1 Cisco System CSCO

Competitor 2 Alcatel-Lucent ALU 

From what I found you can see several tendencies:

1)Total current assets remain somewhat constant during the quarter period ( except for Alcatel because , they do not have official numbers for the last several quarters ). Reasons for that could be a lot that i am not going to talk about because this is not the objective of this post.

2) I will further show you on Excel table the ratio Total Current assets/Total Assets :

		JNPR	CSCO
Total Current Assets	Q4 Dec 31 2013	3540000	60689000
	Q3 Sep 30 2013	3654100	62796000
	Q2 Jun 30 2013	3680400	65521000
	Q1 Mar 31 2013	3703900	61417000
Total Assets	Q4 Dec 31 2013	10326000	98427000
	Q3 Sep 30 2013	10197700	100741000
	Q2 Jun 30 2013	10013700	101191000
	Q1 Mar 31 2013	9830400	97084000
Ratio TCA/TA	Q4 Dec 31 2013	0,34	0,62
	Q3 Sep 30 2013	0,36	0,62
	Q2 Jun 30 2013	0,37	0,65
	Q1 Mar 31 2013	0,38	0,63

Obviously , the ratio shows that the two companies have a lot of liquidity.

Going back to the different indicators that are included in current assets :

1) The main part of the current assets is going to be in cash and cash equivalent , normally it is going to be stored in bank accounts making interest for the company. As I already stated, it is good that the company has some liquidity in bad times , however , excessive cash is not a good indicator as well. 

2)Short term investments -those are not that liquid , it most probably be government bond but as you know, bonds have the so-called period of maturity, which is e.g. if you make a contract for 2 years to buy bonds, you cannot take this money whenever you want .

3) Net account receivables - We have already been through this in a  previous post but just as a reminder. Net receivables which is owed by the customers , they have already consumed whatever the good is , but they have not pay for it 

4) Inventory - those are all the goods that are in stock . For example , if a company has a lot of inventories , this could mean that they want to expand their business . This implies that the retail sector would be the one which the numbers for inventories are the most important . Imagine what would happen if the demand for 

a good is not satisfied just because there is not enough supply . Clearly , if the company is selling vegetables,fruits or other relatively short-term lasting foods , this could mean that the company may not have a lot of inventories ( although , in case of huge corporations , inventories are at dynamic change ) .

Now we will go through long term assets :

Those long term assets cannot be converted into liquidity .

Let's define them : 

1) The first one is Long term investment  , this is somewhat tricky because although it is called LT investments , it could be very liquid but the company values it a lot , and it needs it a lot , so it is not ready to give it away in the short term

2) Property plant and equipment -this is quite self explanatory; it depreciate over time and at some point it either has to be repaired, or exchanged for new PP&E

3) Goodwill -This is the trickiest of all . Its value is highly relativistic and it cannot be defined easily . Putting it simply , goodwill comes with one company acquire another . Suppose company A acquire company B . Now, A will take all the patents, brand name, customer's trust etc. - this is goodwill. So, A has to pay to B for all these "extras" in order to take advantage of all of them.

4) Intangible assets - these are the assets that can be seen , cannot be touched therefore they are not easily valued .

3) and 4) are somewhat misleading , they could sometimes be either overstated or understated .

This was the first part that is covering assets on Balance sheets , the next post will be about Liabilities.

I know that the subject may be overloaded with definitions , but once you start researching companies , you will see how helpful is to look at balance sheets even making up possible scenarios. 

Thank you again for reading ! 

Plamen

Financial Statement; 1) Income statement

INCOME STATEMENT

As we have seen why the financial information is really important for making investment decision , it is time to go through each of the three fundamental statements separately. 

Defining income statement would be easier to understand if we refer to economics . Clearly , each company will have revenue but it will also have cost of revenue . Subtracting the latter from the first would give us the profit that the company has accumulated over a specified period of time .

Using income statement is important because it shows how the managers spend the money available. Those managers will always try to maximize profit because otherwise they will not attract investors . (Some of the disposable income that a company has will be accumulated by investors )

There are two ways of measuring income statement report :

Multi-Step Format	Single-Step Format
Net Sales	Net Sales
Cost of Sales	Materials and Production
Gross Income*	Marketing and Administrative
Selling, General and Administrative Expenses(SG&A)	Research and Development Expenses (R&D)
Operating Income*	Other Income & Expenses
Other Income & Expenses	Pretax Income
Pretax Income*	Taxes
Taxes	Net Income
Net Income (after tax)*	--

(Source: investopedia.com)

The only difference between the two is that the single step format does not really measure gross and operating income ; it only measures what is accumulated as income before tax and what is the residual after the tax . Obviously , the multi-step format is going to be more specific that the single-step format . You need to know the operating income because that is one of the main factors of the company. Operating income is everything that is left AFTER taking out operating expenses ( operating expenses is quite broad topic, e.g. it may vary from cost of producing a good to depreciation . Actually , depreciation and amortization is included in operating costs because the company has to sustain e.g.the level of productivity of their machines.) . To put it in another way , operating income is defined by the formula :

Operating  income=Gross income-operating costs*

(*Depreciation and amortization are included in operating costs)

Let's look at a sample income statement:

Looking at the gross profit , you can see ever-growing numbers . One more thing that stands out is the 25% increase in the gross profit on the quarter between 30.09.2013 to 31.12.2013 . Obviously , the difference between total revenue and cost of revenue has increased . The cost of production remained somewhat constant  relative to the change in the total revenue . So , you can make a conclusion that Facebook must have increased their sales  during this period . The annual data looks even more impressive . They actually have increased their revenue almost two folds . But , is that enough ? Does this look convincing ? Let's look at the change in the price of Facebook's share :

We can actually see that during the period between Sep. and Dec. , it opened and closed its price to somewhat the same price . But do you remember that Facebook has increased its sales 25% ? This is going to affect the price of FB's shares the next period. At this point , you will have to read articles about what Facebook's managers are doing inside the it . What is the next innovation going to be ? When is going to be released ? etc. 

I tried to find an article about comments on the earnings after 31.12.2013 , to see how analysists interpreted the good numbers and I came up with several , but this one was the most interesting :

http://seekingalpha.com/article/1916991-exponential-growth-in-mobile-advertising-makes-facebook-a-buy

In the article the analysist Almario Alexej Alcaraz , who is discussing its development and he is comparing it with its competitors . He is also looking at the P/E ratio and it is important to note something important here. If you see really good numbers , then you should know that growth cannot last forever . Growth itself is dependent on what the managers are doing to SUSTAIN it e.g. for the next quarter . In our example with Facebook , the good earnings of Facebook , made investors invest even more increasing the share price from 45$/share to 67$/share ,which is roughly 30% . Means that if you have invested 1000 dollars on December 2013 , you could have made 300 dollars for four months . You see how important is that you are actually able to read income statement ? 

Let's look further to the income statement of Facebook : ( click on it to see more details)

Another important point that I'd like to make is that all those ratios that we were discussing (P/E, EPS , Quick and current ratio ,etc. ) ->these numbers are all derived from those financial statement and income statement is extremely important for calculating them . One clear example is net profit margin .It is defined as a ratio of profitability calculated as net income divided by sales . So , both sales and net income are coming from income statement . There you go - you can actually calculate most of the ratios on the stock screener for each particular company .- isn't that great . You can derive some of the ratios that are not given publicly .

So , these were the points that I want to make , the next post will cover balance sheet - the other important financial statement . 

I will be happy to see further questions !
Thank you !
Sources used and important links ( look at them , they are really well explained ) :

• http://www.investopedia.com/terms/p/profitmargin.asp
• http://www.investopedia.com/terms/o/operatingincome.asp
• http://www.investopedia.com/walkthrough/corporate-finance/2/financial-statements/income-statement.aspx
• http://www.sec.gov/answers/form10q.htm

Plamen Filipov 

Introduction to Financial Statements

Hello everyone,

This is my third post and it is going to be about Financial Statement .In your last session you have been presented to interpretation of the three basic financial statement .(!!! Have in mind that financial statements represent absolutely nothing if you have not looked at other indicators such as EPS, P/E , liquidity ratios,etc. i.e. you start looking at financial statement after you feel interested in the indicators that are given for it !!!)

In general ,the maim purpose of the financial statement is to represent some information about the overall financial performance of a particular company over a specific period ( i.e. either annually or quarterly). The time that normally takes for a company to publish reports is three months (quarterly).Most of the times when you are looking for those income statements , I would advise you to use finance.yahoo.com but in some cases ( in particular, small companies) , they do not report it publicly . Obviously , you are extremely interested to get to know what the income statement shows quarterly because investing in stock means that you should have some fixed target time span ( very relativistic definition ) . So , as most of the times your target time span would be somewhere around six months to one year . This implies that you need the most current information , which is quarter over quarter change .

Here is  an example with a company (ticker CYNI ) . It is a relatively small company , its market cap is 181 millions . When you try to take an income statement on yahoo finance , there is no information at all. What you can find that though,on so-called 10q and 10k( you can find it on the official sites of all the companies).
Technically speaking 10k is an annual report and 10q is a quarter report.(Note: If you see somewhere 8K , this is related to events such as acquisition of a company,bankruptcy,etc.

This is an example of income statement that is giving information for quarter data. Each company that is registered publicly traded are required to give quater data . ( U.S. securities and exchange commission)

According to U.S. securities and exchange commission , there are deadlines for submitting report . Those deadlines are defined by how huge the market cap of a company is . For the three different categories :

	Revised deadlines
Category of Filer	Column2	Column1
	Form 10-K Deadline	Form 10-Q Deadline
Large Accelerated Filer($700MM or more)	60 days	40 days
Accelerated Filer($75MM or more and less than $700MM)	75 days	40 days
Non-accelerated Filer(less that  $75MM)	90 days	45 days

One more important point that I'd like to make is that , even if you do not find the financial statements that you need on e.g. finance.yahoo.com you can still find reports on U.S. Securities and Exchange site.

On the next post , I will comment specifically about each of the three main types of financial statement :

1) Income statement 

2) Balance sheet 

3) Cash flow 

Links that you will find helpful:

• More on the deadlines for publicly traded companies ( Have in mind that this is only true for the U.S. market) http://www.sec.gov/answers/form10q.htm
• 10q reports for ALL COMPANIES ON U.S. MARKET ( really important for 10q of those small companies that you cannot find ): http://www.sec.gov/edgar/searchedgar/companysearch.html

Current and Quick ratio

Hi everyone,

Today We will see how the two so-called liquidity ratios are related .

We will talk about current ratio and quick ratio. It is defined by the formulas :

1)Current ratio=Total Assets/Current liabilities

2)Quick ratio=(Current assets-inventories)/Current liabilities=(cash(the most liquid assets)+marketable securities( also relatively liquid)+accounts receivables)/Current liabilities

(Note that securities are less liquid than cash . Account receivable is money that customers owe to the company , e.g. they have already used the product that haven't paid for it yet)

I will first talk about current ratio and after that I will point out the only difference between the two financial rations.

So , The formulas are really self-explanatory . Just looking at it , it shows you that given you have assets and you have some debt , what the ratio is between the two. Remember that total assets include all forms short term assets material,cash,inventory,etc. that represent some value- it is valued by others . As you can imagine , current ratio could be used as a financial indicator of the current performance of a company. I highlighted current in the last sentence for a particular reason. Why I did that? Well , current ratio can be misleading ,because it shows only the net quantity of assets and liabilities .But as you can imagine we are interested more in the long run financial statements ,that are representative and that shows how the two have evolved over the time -this can give you some general idea how the company has been operating for the last year/quarter .

The only thing that is not included in quick ratio is inventories.These are the ready products that are in stock, that are not in circulation. This means that this ratio is really relevant for the net liquidity -> as we pointed out quick ratio represents what it would happen if the company has to pay all its debt to its borrowers and if it is below 1 then it means it will have liquidity problems and vice versa if it is above 1 , it will pay all its debt and still left with some assets , depending on what the ratio is  .

As we defined the two liquidity ratios , we may spot some things.We already introduced the balance sheets,income statement and cash flows and very soon you will be given detailed information about each indicator and what it represents . You will have to understand it because  they show what was the accountancy plan for e.g. the last quarter/year and you can make judgements why it is good or why it is bad ( you can find those financial statements in finance.yahoo.com ). One good example would be inventory . This can be counted as part of total assets-> it is short term , i.e. it is expected to be utilized at some point in the mere future. So , imagine that the company actually have a lot of inventory in circulation . The instant example that came to my head was Amazon, but let's try to find something else. I will give some intuition of how you can find a company that has a lot of inventories …

I was looking for a good example when the current ratio may not be a good representation . If you want a company that has current ratio below 1 and quick ration above 1 (i.e. this means that this company could potentially have liquidity problems if all its borrowers decide to take their money back). So , I went to finviz.com and I put the two indicators Current ratio>1,5 and Quick ratio<1 , which is like they have a lot of inventory . I came up with 124 companies and I just ordered them by market capitalization to see more famous tickers . I chose CSV (Caremark Corporation) looking at the two ratios : QR=0,9 and CR=1,6 . So  why I gave you this example ? Because if a company has a lot of inventory this could potentially mean that it has some plan . Even with our example CSV , these are drug stores in USA , maybe they want to expand oversees , otherwise why would they have so much inventory .( it could be because of good precious sales and bad current sales , but looking at the other indicators , this is highly unlikely . Of course , you need further investigation , but this is the first impression – I am not saying whether it is right or wrong ! )

So , next time we will talk about time period changes because current and quick ratio are just the financial condition in some point of time – not very representative!

I posted the main indicators  for CSV taken from finviz.com , I wanted to show you that , it is not enough if you want more insight into the operational system , that is why you need look for other sources.

Market Cap	87.44B
Income	4.60B
Sales	126.76B
Quick Ratio	0,9
Current Ratio	1,6
Debt/Eq	0.35
LT Debt/Eq	0.34

See you soon!

Links and sources :

• http://www.investopedia.com/terms/q/quickratio.asp
• http://www.investopedia.com/terms/c/currentratio.asp
• The example of a company with a lot of investories http://www.finviz.com/quote.ashx?t=CVS&ty=c&ta=1&p=d&b=1 

Chief Editor :Plamen Filipov
Contact: Plamen.S.Filipov@hotmail.com

Follow us on: https://www.facebook.com/SurreyInvestingSociety

PEG ratio ; further comments

Hello inspired investors,

Remember ! ,

From the last presentation , as we discussed PEG ratio, you should have in mind that high P/E does not neccesarily mean that the stock is overvalued . Just because the stock price is high relative to the earnings does not ultimately mean that the price will go down. For example , the present P/E ratio of AMZN share is around 600 ,which may sound overvaluation but if the price of a share is sustainable relative to the earnings that the company has , this implies stability .But if you take another ratio into consideration , which is PEG , you will find more information behind the numbers. As defined by investors , PEG=( P/E ration )/ Annual EPS . So , what can we infer about this ratio ? Well, if we take the example with Amazon , it is obvious that this company is the leading one in the business , however we cannot compare it with Ebay . ( the market cap of Amazon is 3 times larger that ebay , they have different sales,etc. So , how are we going to compare it ? This is simple , as we defined PEG, it does not just depict the price to earning but also the growth of the company (EPS) , in other words, the resulting ratio is better for comparing companies with different growth rates. 

Also , a good point to make here would be that in the long term , The P/E ratio of any company that's fairly priced will equal its growth rate", i.e., a fairly valued company will have its PEG equal to 1. So ,what is the intuition here ? If the company’s PEG is below 1, e.g. it is 0,6 , this means in the long run it will equate to 1 and vice verse , if it above one , just like Amazon has PEG=14,24 it may go down . 

So, someone might ask : “if the PEG of a company’s share is 14,24 , isn’t it logical it will go down “ . The answer would be related to the trust that investors have in the company . If the mainstream is that the company’s price is 372 dollars (Amazon’s share price) , then it is going to be that much . If they keep on making innovations , it may even rise more than that. As long as the price is sustainable , investors do not really bother to think that the price is overvalued . It is all about what value you give behind a particular share .That is where the articles will be of crucial importance , that is why on the last presentation you were given articles . These articles ,news, earnings ,balance sheets, cash flow, income statement ,etc. , represent the intrinsic value of the stock .

I will put some links here if you are further interested and if you have any further questions you are always welcomed to ask :

1)This is a video that explains the basics of PEG ratiohttp://www.investopedia.com/video/play/peg-ratio/
2)This is just Wikipedia , but make sure that you understand the advantages and disadvantages of PEGhttp://en.wikipedia.org/wiki/PEG_ratio
3) This basically is PEG ratio explained with a little more details
http://www.youtube.com/watch?v=jfuBbRmksGo

Thank you for the attention !

Chief editor: Plamen Filipov

Contact:Plamen.s.Filipov@hotmail.com