Fundamentals of Financial Analysis: Module 1

🔍 What Is a Balance Sheet?

A balance sheet is a snapshot of a company’s financial health at one point in time. It shows:

• What the company owns (Assets)

• What it owes (Liabilities)

• What is left for the owners (Shareholders' Equity)

👥 Who Uses the Balance Sheet and Why?

🧾 Shareholders (Owners)

• Look at cash to see if the company can pay dividends.

• Decide if the company is healthy enough to invest more money in.

🏦 Creditors (Lenders)

• Check how much debt the company has compared to its equity.

• Want to know if the company can pay back loans.

💼 Buyers (People Who Might Buy the Business)

• Look for extra assets (like unused land or equipment) that could be sold.

• Want to know how much the business is really worth.

📊 What’s on the Balance Sheet?

✅ Assets (What the Company Owns)

• Current Assets: Things like cash, inventory, and money others owe the company (used within 1 year)

• Long-term Assets: Buildings, land, machines (used for many years)

• Tangible Assets: Physical things (e.g., buildings)

• Intangible Assets: Non-physical (e.g., patents, brand value)

💸 Liabilities (What the Company Owes)

• Current Liabilities: Bills due within a year (like wages or short-term loans)

• Long-term Liabilities: Loans and obligations due in more than a year

📈 Shareholders' Equity (What’s Left for Owners)

• This is what’s left after paying all debts:
  Equity = Assets − Liabilities

• Includes:

  • Money invested by shareholders

  • Profits kept in the company (retained earnings)

📌 Why It Matters

🧠 Key Takeaways

• The balance sheet shows a company’s financial strength or weakness.

• It helps people decide if a company is worth investing in, lending to, or buying.

• A strong balance sheet usually means the company is in good shape.

Income Statement

🔍 What Is an Income Statement?

The income statement (also called the profit and loss statement or statement of operations) tells you:

👉 How much money a business earned and spent over a specific time (like a quarter or year).

It’s like a report card for how well the company is performing through its day-to-day work.

♻ Why It Matters: The Operating Cycle

Every business has an operating cycle, which repeats as long as the company runs:

1. 🛒 Buy goods (inventory)

2. 💸 Sell them to customers

3. 💰 Collect cash from sales

The faster and more efficiently this cycle runs, the more profit the business makes.

A company wants to turn cash into more cash by using its operations, not just outside funding.

📊 What’s on an Income Statement?

1. Revenue (Money In)

• This is all the money the company earned during the period.

• Includes:

  • Sales of products or services

  • Other income like interest, rent, or dividends

2. Expenses (Money Out)

• These are the costs of running the business.

• Examples:

  • Cost of goods sold (COGS)

  • Salaries and wages

  • Rent, utilities, taxes, interest

3. Profit or Loss (Result)

• This is what’s left after subtracting all expenses from revenue.

🧠 Why the Income Statement Matters

🔑 Key Takeaways

• The income statement shows how well a business is performing over time.

• Profit means the company made more money than it spent.

• It helps you decide if a business is healthy, efficient, and worth investing in.

Cash Flow Statements

🔍 What Is a Cash Flow Statement?

The cash flow statement shows where a company’s cash comes from and where it goes during a specific period (e.g., a quarter or year).

It’s split into three main sections:

• 🏢 CFO – Operating Activities

• 🏗 CFI – Investing Activities

• 🏦 CFF – Financing Activities

📊 1. CFO – Cash Flow from Operating Activities

"How much cash does the business generate just by doing its job?"

Includes:

• Cash received from customers

• Payments to suppliers, employees, taxes

• Changes in working capital (like inventory or accounts receivable)

🏗 2. CFI – Cash Flow from Investing Activities

"How is the business investing in its future?"

Includes:

• Buying or selling property, equipment, technology

• Acquiring or selling businesses

• Buying or selling financial investments

🏦 3. CFF – Cash Flow from Financing Activities

"How is the business raising or returning money?"

Includes:

• Borrowing or repaying loans

• Issuing or buying back stock

• Paying dividends to shareholders

📈 Example Summary Format:

🔁 Net Change in Cash

CFO + CFI + CFF = Change in Cash

Add all three sections together. This tells you how much cash the company gained or lost over the time period.

🧠 Why Does This Matter?

🧮 Google Sheets Quick Tip Formulas

🔑 Final Thoughts

• CFO is most important — it reflects operational health

• CFI reveals investment strategy

• CFF shows funding structure and capital decisions

• Healthy companies have strong, positive CFO, smart CFI, and disciplined CFF