Financial Statements and Ratios: Key Concepts for Business Analysis

Income Statement

How much we make.

Accrual based reporting of the company's profits and losses over a

period of time. It describes the inflows (Revenue), outflows (Expenses) and

resulting profit (Income).

Balance Sheet

How much we're worth.

Snapshot of the financial position of the company at a point in time. It describes

what the company owns (Assets), owes (Liabilities) and it's remaining value to investors

(Equity).

Cash Flow Statement

How much cash we have.

The sources and uses of the company's cash over a period of time. It

describes how cash moves in and out of the company based on the company's

operations, investing and financing activities.

Current Assets

◦ Cash = $ in the bank

◦ Accounts Receivable (A/R) = Credits/money due from customers

◦ Pre-paid Expenses = Goods and services already paid for, but not used (ie rent)

◦ Inventory = Value of goods, from raw materials to finished product

Non Current Assets

◦ Fixed Assets = Property, plant and equipment

◦ Investments = Financial securities with maturities greater than 1 year

◦ Goodwill / Intangibles = Non-physical assets such as brand, trademarks, patents,

copyrights, etc. Most often, decrease in value over time (amortized)

Current Liabilities

◦ Accounts Payable = Amount owed to a creditor/vendor (bill/invoice received and not

paid)

◦ Accrued Expenses/Liabilities = Amount earned but not due (ie salaries)

◦ Deferred Revenue = Advance payments from customers

◦ Current Portion of LT Debt = Debt outstanding that is due & payable in less than 1 year

Non Current Liabilities

◦ Notes/Bonds Payable = Amount to be paid on bond/note outstanding

Net Worth/Equity

◦ Invested capital and retained earnings (net income)

Profitability

Measures how much money a business is making

Activity

Measures how effectively a business uses its assets

Liquidity

Measures the ability of a business to meet its short-term obligations

Leverage

Measures the extent to which a business relies on using debt to finance

operations, rather than equity

Investor Return

Measures the value the investor earns on its investment in the business

Compounded

Annual Growth Rate

Measures the average year over year

growth rate over multiple years

Gross Profit Margin

Measures the % Revenue retained after

paying for the cost of product

Operating Profit

Margin

Measures the % Revenue retained after

paying operating expenses

Net Profit Margin

Measures the % of Revenue retained by

the business after paying the bills

(expenses)

Return on Assets

Measures profit earned on the investment

of all assets in the business

Return on Equity

Measures profit earned on investments in

business assets provided by shareholders

Return on Invested

Capital

Measures the profit earned on capital

(independent of the amount of leverage)

Asset Turnover Ratio

Measures how effectively a

business uses its assets to

generate sales

Inventory Turnover Ratio

Measures how many times

the inventory is bought and

sold (ie turned) in a year

Days Receivables

Outstanding

Measures the average amount

of time it takes to collect from

a customer

Days Inventory

Outstanding

Measures the average amount

of time it takes to sell a piece

of inventory

Days Payables

Outstanding

Measures the average amount

of time an invoice is

outstanding and unpaid

Current Ratio

Measures the ability of a business to

pay its obligations with the assets it

already owns

Quick Ratio

Measures the ability of a business to

pay its obligations with the assets it

already owns (without relying on

selling inventory)

Net Working

Capital

Measures how much cash and other

assets are available to pay repay all

the liabilities that are due in the next

several months. Proxy for free cash

flow.

Debt to Equity

Ratio

Measures the amount of debt

financed by the shareholders

Debt to Total

Capital

Measures the amount of debt

financed by the shareholders (%)

Assets to Equity

Ratio

Measures the amount of equity used

to finance assets

Interest Coverage

Ratio

Measures if a business has enough

earnings to pay for the interest

expense incurred by its debt

obligations