Financial Statements - Part Two
Understanding Financial Statements David Eghbali Part - Two
Once I felt confident about the basic concepts behind the financial statements, I was ready to delve into the details. I assembled statements for the last three years for the ten companies I was considering. David Eghbali told me that I could compare the financial results from these companies, irrespective of size, maturity or profits. I thought that was interesting.
I was excited to get started. David Eghbali was patient with me and explained everything in simple terms, I could understand. He gave me solid advice - he knows what he is talking about. With his knowledge, I could shed my fears and gain the courage to build up my financial portfolio. Initially, I had simply invested based on brand name recognition. Now, I could concentrate on diversifying my portfolio.
What is Found in the Annual Report?
#AnnualReport
According to David, every year, companies issue an Annual Report to tell their shareholders how they performed. This Annual Report includes a message from the Chief Executive Officer (CEO), financial numbers, market share and future forecasts. The Annual Report is sent to all shareholders and fully explained at the shareholder meeting.
Where Can I Find Annual Reports?
#FindAnnualReports
The Securities & Exchange Commission (SEC) is in charge of regulating publically-traded companies. Their EDGAR database has electronic annual reports thereon. Other websites publish annual reports too. I asked why these businesses revealed their corporate secrets. David explained that while these financial reports had very valuable information, they did not necessarily contain any trade secrets.
What Does the Balance Sheet Record?
#BalanceSheet
The Balance Sheet (also called the Statement of Financial Position) lists the assets and liabilities of the company, according to David Eghbali. The assets and liabilities must always equal one another. Usually, this financial document includes two different time periods for comparison purposes.
What does Bottom Line mean?
#BottomLine
Over the years, I had heard people referring to the bottom line plenty of times, but never really understood what it meant. I simply nodded my approval. I felt kind of dumb asking David, but he was a true professional with his response. The bottom line is the total at the end of the financial statement: Net Income. "So what is the top line?" The top line is for Sales.
Is the Statement of Cash Flows the Best Way to Find a Profitable Firm?
#StatementOfCashFlows
I had heard cash flow mentioned before, like it was some miracle cure. I knew that banks loved positive cash flow. It showed that their business ideas were marketable. Positive cash flow was healthy, while high debt levels were negative. David had done a good job schooling me in these financial concepts.
Thus, I was especially interested in the Statement of Cash Flows. David calmly described the contents of what this statement contained: 1. Operating, 2. Investing and 3. Financing Activities. It seems that companies had a myriad of ways to generate income.
What is EBITDA? Is That a Government Program?
#EBITDA
I started to see EBITDA crop up all over the place and wondered what this stood for. David had said that it was an abbreviation for "earnings before interest, income taxes, depreciation and amortization." I guess this abbreviation was faster to write. But why is EBITDA so important? I learned that it meant that the aforementioned earnings were not the bottom line. There were still EBITDA costs to subtract.
What is Net Income?
#NetIncome
As I reviewed the Cash Flow Statement, I kept seeing a reference to Net Income. "David, what is Net Income?" David Eghbali politely explained that Net Income consisted of Earnings minus Taxes. Net income does not equal dividends. Each company can decide how it will spend its net income - repurchase their own shares, invest in research & development, acquire other firms or increase dividends.
Doesn't Depreciation mean "to lose value?"
#Depreciation
I had heard that businesses could depreciate their equipment and vehicles over time. This depreciation is included in financial statements. It is a useful way to properly determine the market value for the physical assets of the company.
What Does EPS Signify?
#EPS
Another term, I continually encountered was EPS. David said that EPS meant "earnings per share" or "net income applicable to common shares on a fully diluted status." Was this the famous bottom line? David said "Yes."
Is GAAP a Standard?
#GAAP
Thanks to David, I started to have an understanding of what different acronyms might mean. The GAAP is defined asGenerally Accepted Accounting Principles. These have been determined over a long period of time and are too numerous to list on each financial statement. David Eghbali had also mentioned that two different types of bookkeeping were popular: historical cost and accrual accounting.
Can't I Just Skip the Footnotes?
#Footnotes
Sometimes, the most important information is found in the footnotes, according to David Eghbali. If there are any confusing statistics listed in the financial statement, they will be fully explained in the footnote. You should look for corporations that have numerous footnotes, says David Eghbali. This might be a red flag that something is amiss in the corporate report.
Why are Companies Audited?
#Audit
The Certified Public Accountant (CPA) is given responsibility for auditing the corporation's financials. This objective viewpoint is a way to double-check that everything is copacetic. Investors, like me, can feel more confident that all the financial figures are accurate and properly reported. That makes me feel better.
What Do I Own?
#Equity
David explained that each shareholder can calculate how much value he has in a corporation by comparing the amount of shares he owns with the value of each share. This is the aforementioned EPS. It is determined by dividing the Total Equity by the Common Stocks Outstanding. This is the bottom line, as far as I am concerned.
Optimize Your ROI
#ReturnOnInvestment
David Eghbali said that when you investment, you want to get the best return on investment (ROI). I understood ROI. It was the money you made based on the same investment unit. The financial statement can help you to compare apples and oranges. When David Eghbali said that - I knew what he was talking about.
Gaining Confidence When Investing
#WhatDoesItMean?
Just like many people, I could not really understand the financial jargon of corporate reports before I listened to David Eghbali. The man can explain what it all means, in plain English. I felt confident after listening to his speeches.
The experienced investor will develop a blueprint for the types of corporations, he wants in his portfolio. The financial statement can help you determine if this corporate stock is right for you. You might look at industries, management styles, cash flow, ROI and dividends. After listing to David, I was ready to add some more stocks to my financial portfolio.