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Financial Statements

Income Statement, Balance Sheet, Cashflow Statement

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Financial Statements Summary

In financial statement analysis, your goal is finding companies with disciplined financial practices, responsible management, and long term market prospects. In valuation, the goal is determining the value of investments, which is used as an indicator of your desired purchase price. Their value is based on their financials. Investing is best when the investment is deeply below the valuation. You must be able to read and understand financial statements. Financial Statements are your primary source of data for company investigations. These statements display all the crucial data that you can use to analyze past performance, hint at future prospects, and give valuations to compare with market prices.

Financial Statements are comprised of several standard sections alongside supplementary documents that clarify or enhance the standard statement’s meanings. The three standard reports to be expected are the Income Statement (also known as the Profit & Loss Statement), the Balance Sheet, and the Cash Flow Statement. The Income Statement summarizes the profit of the company over a period of time, the balance sheet shows financial structure at a moment in time, and the cash flow statement displays the entry and exit of liquid cash into the business while linking the balance sheet and the income statement.

Financial Statements

Major Economic Analysis

Economic Summaries
Statistical Currency Projections
Large Speculator Sentiment
Technical Signals Lists

American Equity Markets

Economic Performance Index
US Dollar Projections
Market Sentiment Tracking
Sector Strength Tracking
Consensus Estimate Rankings
Fundamental Firm Analysis

Who must release a Financial Statement?

Virtually all companies must release a financial statement annually. Many companies publish for different reasons, but between upkeep, reporting, and taxation almost all companies must publish. This rule often extends to charities. In general, these are the various entities that must release a financial statement.

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Who reads financial statements?

Financial statements are widely distributed by nationalized, private, and public sector companies. The readers are those who typically are impacted the most by the corporations. This includes Shareholders, Lenders, Employees, Unionized groups, Management, Governments, Tax Agencies, Customers, and Competitors.

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Income Statement

The income statement summarizes the profit of the company over a period of time, usually either a quarter or a full year. The statement begins with the revenue earned during that time, subtracting expenses until it reaches retained earnings. Retained Earnings is the businesses true profit at the end of each statement, and a business should never be considered profitable unless this figure is positive while cash assets have increased.

Income Statement Summary

Income Statement Summary

The income statement summarizes the profit of the company over a period of time, usually either a quarter or a full year. The statement begins with the revenue earned during that time, subtracting expenses until it reaches retained earnings. Retained Earnings is the businesses true profit at the end of each statement, and a business should never be considered profitable unless this figure is positive while cash assets have increased.

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Revenue & Gross Profit

Revenue & Gross Profit

Every business survives based on sales. If a firm has no sales that firm has no income. A company must have sales revenue coming in, and it subtracts the cost of making goods they’ve sold. The result is gross profit. You should prefer to see revenue and gross profit trending upwards.

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Operating Income

Operating Income

Operating expenses are the costs that are created from running the company, but not from creating its goods and services. This includes several expense categories, such as selling, general, administrative, research, development, depreciation, and other expenses. These are all internal business costs, external costs such as interest or taxation are not included. The final result after Operating expenses is Operating Income, which is the total income/loss from manufacturing of goods and all indirect processes of running the business. Strong firms can reduce these charges, function more efficiently than their competition, and maintain higher operating income.

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Net Earnings

Net Earnings

This section includes and deducts costs that weren’t associated with manufacturing or with company operations. These usually are financing and asset costs. If a company took a loan for expansions or productions, or had a gain/loss on an asset or investment sale, its recorded in this section. Taxes are also deducted from earnings in this section. The leftover profit is retained as “net earnings”. You want to see net earnings increasing over time as both a raw value and a percentage of net earnings.

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Dividends and Retained Earnings

Dividends and Retained Earnings

After you’ve deducted all expenses from sales you reach the retained earnings section of the income statement. This section looks at the amount of money payable to shareholders and kept within the bank. This is especially important on a per share value, since they strengthen your returns on a per share basis. You want to see upwards trends in all subsections of this section.

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Balance Sheet

The balance sheet shows changes to the financial condition at a specific moment instead of over a period of time. The balance sheet captures assets, liabilities, and equity at the end of a quarter or fiscal year, and displays the relationship in readable form. The balance sheet represents a very specific equation, which must be equal on both sides. The equation reads as

“Assets = Liabilities = Equity”.

The formula states that all assets must have been purchased with either money invested into the firm or money lent to the firm. The section labeled Shareholder’s Equity also represents profit that the firm retains from its business operations which are the last possible source of funding.

Balance Sheet Summary

Balance Sheet Summary

The balance sheet shows changes to the financial condition at a specific moment instead of over a period of time. The balance sheet captures assets, liabilities, and equity at the end of a quarter or fiscal year, and displays the relationship in readable form. The balance sheet represents a very specific equation, which must be equal on both sides. The equation reads as “Assets = Liabilities + Shareholder’s Equity”.

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Current Assets

Current Assets

Current assets can be converted to cash in less than one year. This section of assets is used to pay off debts that also are coming due within one year. Current assets are direly important to a company’s short term, since they can quickly be turned to cash to allow a company to move through a rough business period. They are listed in the order of the most liquid to least, based on how difficult it is to convert them to cash. It may be labeled Quick, Liquid, Floating, or Working assets. You should ensure companies you are investing in have current assets which exceed current liabilities.

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Fixed Assets

Fixed Assets

Fixed assets are assets that won’t be converted to cash within one year. This usually indicates assets that are used for the production of goods or services. They are typically not used to pay off current liabilities, unless it’s an emergency. Fixed assets consist of two separate sections, the first is Tangible Fixed Assets, and the second is Intangible Fixed Assets.

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Current Liabilities

Current Liabilities

Liabilities consist of the various short and long term debts of the company. Current Liabilities are debts that are due to be paid within the year, usually due to suppliers and sometimes due to creditors. Current Liabilities consists of Accounts Payable, Accrued Expenses, Short Term Debt, Other Current Liabilities, and Debts Due for Repayment. Payment for Current Liabilities comes from Current Assets. You should always be sure a firm has enough current assets to pay their current liabilities.

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Long Term Liabilities

Long Term Liabilities

Long-term liabilities are all of the long-term debts the company has on record. These liabilities are typically over a year in length. These debts will eventually come due in the future. The value of long-term debt due for repayment this year is found in the current liabilities section called “Debt Due for Repayment”.

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Shareholder’s Equity

Shareholder’s Equity

Shareholder’s Equity represents all of the money invested within the firm and the return on these funds over time. It also contains the firm’s net worth after all debts and liabilities are settled. This is the only other alternative for funding other than liabilities, which contain loans and credit. Shareholder’s Equity contains Common Shares, Preferred Shares, Paid-In Capital, Retained Earnings, and Treasury Shares as its categories.

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Cash Flow Statement

The cash flow statement summarizes all the cash that enters or exits the business. It adds inflows into the company and subtracts outflows from the company. If the equation is positive the business is said to be cash flow positive, if negative the company is said to be cash flow negative. Only operations that deal with cash are included, unpaid purchases or owed payments are not.

Cash Flow Summary

Cash Flow Summary

The cash flow statement summarizes all the cash that enters or exits the business. It adds inflows into the company and subtracts outflows from the company. If the equation is positive the business is said to be cash flow positive, if negative the company is said to be cash flow negative. Only operations that deal with cash are included, unpaid purchases or owed payments are not. Cash flow depends totally on cash earned versus cash spent by the company. In order for the cash flow statement to be more manageable it is split into three separate sections. These sections are Cash Flow from Operations, Cash Flow from Investments, and Cash Flow from Financing.

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Cash Flow from Operations

Cash Flow from Operations

Operating Cash Flow represents the flow of cash into or out of the business based on their “operations”. This represents all the common day to day actions associated with the business. Look at Operations Cash Flow to see if cash flow from the business model is positive or negative. If positive, the business creates more cash than is needed for its basic functions. If negative, the business is losing money from its day to day operations. This means the business is acquiring cash from elsewhere to carry its negative operations: previously retained earnings, income from investments, or cash from financing. At some point, the company will be forced to earn positive cash flow from operations or go out of business. Consistently negative cash flow from operations always leads to bankruptcy.

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Cash Flow from Investments

Cash Flow from Investments

Investments made by a company also affect cash flow, and an entire section of the cash flow statement is devoted to recording these changes. Cash flows into a company when investments generate cash payments. As a general rule, if companies have large inflows, they have sold investments, acquired dividends, received other payments from investments, or had investments mature. If an outflow occurs the company is purchasing investments for the future. As an investor, you should look into the footnotes to see if any specific investments are listed.

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Cash Flow from Financing

Cash Flow from Financing

All company funding generally comes from three sources. It enters the company through Loan, Investment, or Generated Revenue. Cash Flow from Financing records cash flows into or out of the company from Loans and Investments. Subsidies or Grants, if applicable, may also appear here. Essentially, it covers non-internally generated cash flows, since Cash Flow from Operations measures inflows from sales and revenues, and Cash Flow from Investments measures inflows from investment returns.

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Financial Statements

International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups

Financial Statements

American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

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