Everything Finance

Balance Sheet

Snapshot of what a company owns and owes at a certain point in time

Includes:
- Assets
- Liabilities
- Shareholders Equity

ALE

Assets = Liabilities + Equity

Assets

Resources a company owns that are used to generate profits

Current Assets

Liquidatable in <=1 year

Examples:
- Cash (+cash equivalents)
- Marketable Securities
- Accounts Receivable (already have but need to pay)
- Inventory
- Prepaid Expenses (i.e. rent for the year)

Non-Current Assets

Liquidatable in >1 year

Examples:
- Long Term Investments
- Plant, Property, and Equipment (PPE)
- Intangible Assets
- Goodwill

Liabilities

Cash a company owes to other parties

Current Liabilities

Liquidatable in <=1 year

Examples:
- Current Portion of Long-Term Debt
- Accounts Payable (already taken but still need to pay)
- Interest + Taxes Payable
- Deferred Revenue

Non-Current Liabilities

Liquidatable in >1 year

Examples:
- Long-term Debt
- Deferred Tax Liabilities
- Pension Fund Liabilities

Shareholder’s Equity

Capital Attributed to Company Owners

Line Items:
- Retain Earnings (prior retained earnings + net income - dividends)
- Treasury Stock (stock bought back by the company)
- Preferred Stock (separate class of equity for special investors)
- Common Stock (class of equity representing ownership in a company)
- Additional Paid-In Capital (amount invested in excess of common stock)

Cash Flow Statement

A company’s actual cash generated and spent over a period of time (quarterly or annual basis)

Parts:
- Operating Cash Flow
- Investing Cash Flow
- Financing Cash Flow

Operating Cash Flow

Cash generated or spent from the delivery of regular goods or services (Core business)

Investing Cash Flow

Cash generated or spent from the purchase and sale of assets and investments

Financing Cash Flow

Csh generated or spent from debt and equity financing (how you’re paying back debts)

Net Change in Cash

Operating Cash Flow + Investing Cash Flow + Financing Cash Flow
(Could be positive or negative)

Positive Cash Flow

Company Can:
- Reinvest into its operations
- Invest in CapEx (long-term investments)
- Settle Debt Payments
- Pay equity holders via dividends

(does not always imply the company is profitable)

Negative Cash Flow

Signals one of two things:
1. Company is spending more cash than it earns (could lead to bankruptcy)
2. Company is reinvesting heavily back into its business or paying debt or equity holders

(does not always imply the company is unprofitable)

Cash Flow from Operations

Line Items:
1. Net Income (always starts it)

Plus:
2. Depreciation and Amortization (add back non-cash items)
3. Other non-cash working capital (add back non-cash items)

Plus or Minus (gets cash-to-equity from operations):
4. Change in Accounts Receivable
5. Change in Inventory
6. Change in Other Current Assets
7. Change in Accounts Payable
8. Change in Taxes Due

Cash Flows from Investing

Line Items:
Plus:
2. Divestitures of Assets (selling part of company)*
6. Divestitures of securities & non-operating

Minus:
1. Capital Expenditures (cash spent on PP&E)*
3. Cash Acquisitions
4. Investments in Financial Assets
5. Investments in Non-operating Assets

Cash Flows from Financing

Line Items:
Plus:
1. Debt Raised
3. New Equity Issuances

Minus:
2. Debt Repaid
4. Dividends Paid
5. Stock Buybacks

Income Statement

Reports a company’s revenue, costs, expenses, and profits/losses over a period of time

Income Statement Formula

Revenue - COGS - Expenses = Profit

Line Breakdown:
(+) Revenue ← Top Line
(-) COGS
= Gross Profit
(-) Operating Expenses
= Operating Income
(-) Interest & Taxes
= Net Income ← Bottom Line

Revenue

Revenue = Price of Goods x Quantity Sold

Operating Revenues

Core Business Activities:
- Product/Service
- Geography
- Subsidiary
- Sales Channel

(90% of revenue)

Non-Operating Revenues

Non-core Business Activities:
- Interest Income
- Rent Income
- Partnerships
- Other Income (Gains)

Cost of Goods Sold (COGS)

COGS = Cost per Units x Quantity

COGS Breakdown

Direct Expenses:
- Raw Materiales
- Labor
- Packaging
- Depreciation

Depreciation

Large physical assets losing their value over time (wear and tear)

Appreciation

(Same as Depreciation but for non physical assets)

Business Definition:
Spreading out the cost of a non-physical asset (like a patent or software)

Interest Definition:

Spreading out loan payments over time until the debt is $0

Expenses

Money spent to maintain the operations of a business

Operating Expenses (OpEx)

Primary Operational Activities:
- Selling, General, & Administrative (SG&A)
- Research & Development (R&D)
- Marketing
- Other Operating Expenses

(bulk and recurring expenses)

Non-Operating Expenses

Secondary Activities and Losses:
- Interest Payments
- Losses on Assets
- One-Time Costs
- Lawsuits

Profits

The net money made after taking away deductions

Gross Profit

Revenues - Cost of Goods Sold (COGS)

Operating Income (or Operating Profit or EBIT)

Gross Profit - Operating Expenses

Net Income (or true profits)

Operating Income - Interest - Taxes

Margins

Help provide insights on the operation efficiencies (slope/rate of change) of a company

Gross Margin

Gross Profit / Revenue

EBIT Margin

Operating Income/Revenue

Current Ratio (Liquidity Ratio)

Checks if a company has enough short term (current) assets to pay for its current liabilitites (ie short term debt payments)

CR = Current Assets/Current Liabilities

Quick Ratio (Acid-Test Ratio) (Liquidity Ratio)

Sees if the company can pay its short term (current) liabilitties with only liquid assets (noo inventory cause it takes time to sell)

QR = (Current Assets - Inventory)/Current Liabilities

Cash Ratio (Liquidity Ratio)

Sees if a company can pay its short term liabilities with only cash (most liquid)

CR = Cash/Current Liabilities

Interval Measure (Liquidity Ratio)

How many days we can last if we don’t incur more assets

IM = Current Assets/Average Daily Operating Costs

Average Daily Operating Costs = COGS + Expenses
(EBITDA minus Revenue/Sales)

Net Working Capital

How much money a company has to pay for its daily operations after paying for short term liabilities

NWC = Current Assets - Current Liabilities

NWC to Total Assets Ratio (Liquidity Ratio)

What percent of a company is financed by by net working capital. It is a measure of liquidity based on company size

MWC to TA = Net Working Capital/Total Assets

Total Debt Ratio (Leverage Ratio)

What percent of a company’s assets are financed by debt rather than Equity. Its a solvency (leverage) ratio so it can be used to model long term risk

TDR = Total Liabilities/Total Assets
Total Liabilities = Current Liabilities + Long Term Debt
Total Liabilities = Total Assets - Total Equity

Debt to Equity Ratio (Leverage Ratio)

Sees how much debt a company is taking on compared to its equity. Measures risk
(how much debt for $1 of equity)

D/E = Total Debt/Total Equity

Equity Multiplier (Leverage Ratio)

How much of a company’s assets are financed by equity rather than debt. Also 1 more than D/E Ratio

EM = Total Assets/Total Equity

Long Term Debt Ratio (Leverage Ratio)

How much of financing comes from long term debt. Shows capital structure

LTDR = Long Term Debt/(Long Term Debt + Total Equity)

Interest Coverage Ratio (Leverage Ratio)

Sees if a company can pay back its interest through its operating income

IC = EBIT/Interest

Cash Coverage Ratio (Leverage Ratio)

Sees if a company generates enough cash to pay back interest

CCR = (EBIT + Depreciation) / Interest

Inventory Turnover (Turnover Ratios)

How many times does the company go through its inventory in a year (higher = better)

IT = COGS/Inventory

Days’ Sales in Inventory OR Days of Inventory Outstanding (Turnover Ratios)

How long does inventory sit in the warehouse till it gets sold (how long it takes to sell inventory)

DIO = 365/Inventory Turnover

Receivables Turnover (Turnover Ratios)

How many times per year the company collects its receivables.
(how efficiently management collects money from customers)

RT = Sales/Average Accounts Receivable
Average Accounts Receivable = (Ending AR + Beginning AR)/2

Days’ Sales in Receivables OR Days Sales Outstanding (Turnover Ratios)

Average amount of days for a company to collect money after a sale. (How quick they can turn sales into cash)

DSR = 365/Receivables Turnover

NWC Turnover (Turnover Ratios)

Shows how many dollars is made in sales for $1 of NWC (efficiency ratio)

NWC = Sales/NWC

Usually means:

• Company uses working capital efficiently

• Less money is tied up in inventory and receivables

• Strong cash management

Example:

• Grocery stores often have high NWC turnover because they sell quickly and collect cash immediately

Fixed Asset Turnover (Turnover Ratios)

How efficiently a company uses its fixed assets to generate revenue (how much money in sales per $1 invested in fixed assets)

FAT = Sales/Net Fixed Assets

Total Asset Turnover (Turnover Ratios)

How much revenue per dollar in assets

TAT = Sales/Total Assets

Capital Intensity Ratio (Turnover Ratios)

How many dollars of assets are needed for $1 of revenue. Inverese of TAT

CIR = Total Assets/Sales

Profit Margin (Profitability)

For every $1 of sales (revenue), how much does the company actually keep as profit

PM = Net Income/Sales

Return on Assets (ROA) (Profitability)

How much profit comes from each $1 of assets. (How efficiently a company uses its total assets to generate a profit)

ROA = Net Income/Total Assets

Return on Equity (ROE) (Profitability)

How much money does the company make from each dollar invested from shareholders. (How efficiently it uses shareholders money to make a profit)

ROE = Net Income/Total Equity

Internal Growth Rate

How much a company can grow without taking anymore external debt

IGR = (ROA x b)/(1-ROA x b)

Sustainable Growth Rate

How much debt a company can take on while maintaining its D/E Ratio
(When they take on more debt they increase equity)

SGR = (ROE x b)/(1-ROA x b)

Plowback (b)

Percentage of the company’s earnings that are reinvested back into the company and not paid as part of dividends

b = 1-dividends payout percent

Price-Earnings Ratio (Market Value Ratios)

How much people are willing to pay per $1 of earnings

P/E = Market Price per Share/Earnings Per Share

Market to Book Ratio OR Price to Book Ratio (Market Value Ratios)

How much investors are willing to pay per $1 of a company’s accounting value

PB = Market Price per Share/Book Value per Share

DuPont Identity

The DuPont Identity (DuPont Analysis) breaks down Return on Equity (ROE) into the three major factors that drive it:

1. Profitability (how much profit the company makes)

2. Efficiency (how well it uses assets)

3. Leverage (how much debt it uses)
   (why a company’s ROE is so low or high)

ROE = Profit Margin x Total Assets x Equity Multiplier

External Financing Need (EFN)

How much debt or loans are needed (forecasting)

EFN = Prior LTD - Current LTD

Weighted Average Cost of Capital (WACC)

(% of Equity Cost of Equity) + [% of Debt Cost of Debt * (1 - Tax Rate)]