Introduction to Financial Statement

Introduction to Financial Statement

Speaker Profile: Chua I-Min, CFA Full time Shares Investment Coach: Specialize in Fundamental Analysis Conduct training for retail investors and remisiers through exchanges and broker houses

Disclaimer and Declaration The full content of the program is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares may be citied for illustration purposes and the trainer may have personal interest in the particular shares.

Agenda 1 2 Balance Sheet / Income Statement / Cashflow Statement Financial Statement / Ratio Analysis 3 Reading Annual Reports

Objective of Today s Session Know what are financial statements and how to read them How to make quantitative assessments with information from financial statements Understand the companies story and make an assessment to see if it make sense

BALANCE SHEET

Balance Sheet Snapshot of the current financial condition on a particular date Similar to your annual medical health report

Balance Sheet Asset = Liabilities + Owner s Equity All items purchased by the company Money borrowed to purchase the assets Own money / Shareholders money to purchase the assets

Asset

Asset Income producing items + items that take more than 1 year to be converted into cash

Asset

Asset items that take less than 1 year to be converted into cash

Asset

Liabilities

Liabilities Loans / Money owed that required to be repaid more than 1 year later

Liabilities

Liabilities Loans / Money owed that required to be repaid within 1 year

Liabilities

Owner s Equity

PROFIT AND LOSS STATEMENT

Profit and Loss Statement Record of the companies operating results from the past 1 year Similar to your annual appraisal report

Profit and Loss Statement Revenue - Cost of Goods Sold = Gross Profit - Sales, General and Admin Expenses = Profit from Operations / Operating Profit (Earning before Interest, Tax, Depreciation and Amortization, i.e. EBITDA) - Depreciation - Amortization = Earning before Interest and Tax (EBIT) - Interest = Profit before Tax -Tax = Profit attributable to shareholders of the company

Profit and Loss Statement

Profit and Loss Statement Revenue - Cost of Goods Sold = Gross Profit - Sales, General and Admin Expenses = Profit from Operations / Operating Profit (Earning before Interest, Tax, Depreciation and Amortization, i.e. EBITDA) - Depreciation - Amortization = Earning before Interest and Tax (EBIT) - Interest = Profit before Tax -Tax Non Cash Item = Profit attributable to shareholders of the company

Profit and Loss Statement Non Cash Item

CASH FLOW STATEMENT

Cash Flow Statement Track physical cash movement of the company from the past 1 year Show me the money!

Cash Flow Statement Cash Flow Statement Cash Flow from Operating Activities + Cash Flow from Investing Activities + Cash Flow from Financing Activities = Net increase / decrease in Cash + Cash at beginning of year = Cash at end of year

Cash Flow from Operating Activities Adjustment for non cash item from profit before taxation

Cash Flow from Operating Activities Changes in Working Capital

Cash Flow Investing Activities

Cash Flow from Financing Activities Cash Flow relating to loans and equities

Cash Flow Statement

Statement of Changes in Equity

Notes to Financial Statements

FINANCIAL STATEMENT / RATIO ANALYSIS

Financial Statement / Ratio Analysis 2 stage analysis: Whether a company is healthy Whether the price of a company is fair / overvalued / undervalued Choose only the test that make sense to you!

PROFITABILITY

Profit and Loss Statement Just look at Profit from P & L Statement! Check out for growth too!

Make Sure Profit is translated into Cash!

Profitability Ratio Comparing with another company or industry average Net Profit Margin Return on Equity Return on Asset Who is more efficient in making money?

Profitability Ratio Profit Margin on Revenue Net Profit Margin = Net Profit / Revenue Net Profit = Profit attributable to owners How much money Company can make from sales

Calculate Profit Margin Net Profit Margin = 7.7%

Profitability Ratio Return on Equity Return on Equity = Net Profit / Equity Efficiency of the capital in generating income

Profitability Ratio Return on Equity = 20.5%

Profitability Ratio Return on Asset Return on Asset = Net Profit / Total Asset Efficiency of the asset in generating income

Profitability Ratio Return on Asset = 3.9%

LIQUIDITY

Liquidity Measure the firm s ability to pay its shortterm financial obligation Current Ratio Quick Ratio Cash Ratio Does the Company has enough money to operate for the next year?

Liquidity Ratio Current Ratio = Current Assets Current Liabilities Most commonly used as a gauge to determine if company has enough cash to operate for the next year. However, not accurate as it include non cash item We should be concern if close to or below 1x. As it may indicate company do not have enough Cash to finance its operation for the next 1 year!

Liquidity Ratio Current Ratio 0.60x

Liquidity Ratios Quick Ratio = Cash + Short Term Investments + Accounts Receivable Current Liabilities Cash Ratio = Cash + Short Term Investments Current Liabilities - Remove non cash item - However, may be too conservative

SOLVENCY

Solvency Debt to Equity Ratio Interest Coverage Ratio Measure the firm s ability to repay loan and service interest

Solvency Ratio Debt to Equity Ratio = Total Debt Total Equity How much debt for every dollar of equity More debt: - Higher risk of company not able to repay loan - Greater efficiency as more money for the business No hard rule on the optimal level, but less than 2 is preferred

Solvency Ratio Debt to Equity Ratio 4.14x

Solvency Ratio Interest Coverage Ratio = EBIT Interest Expense Measure Company s ability in servicing interest Higher ratio means that the company is better able to cover the interest!

My Personal Test Criteria Profit for past 5 years Profit converted to cash All positive At least 1 positive for past 2 years Profit Margin > 5% Current Ratio > 1 Debt to Equity Ratio < 2x or 200% Interest Coverage Ratio > 3x

READING ANNUAL REPORTS

Company s direction for the year ahead Company s business and performance Brand name helps!

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