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The financial statement:

@ prlnclpal publls flnanclal aLa abouL a companyprlmarly L balanc sL lncom sLaLmnL
an cas flow sLaLmnL
The balance sheet:
Sow L porLfollo of L assLs for a corporaLlon as wll as lLs llablllLls an ownr ulLy aL onc polnL
ln Llm
They include the following:
O Cash is the cash on hand at the time books are closed at the end of the fiscal year. This
refers to all cash in checking, savings and short-term investment accounts.
O
O Accounts receivable is the income derived from credit accounts. For the balance sheet, it's
the total amount of income to be received that's logged into the books at the close of the
fiscal year.
O
O nventory is derived from the cost of goods table. t's the inventory of material used to
manufacture a product not yet sold.
"Total current assets" is the sum of cash, accounts receivable, inventory and supplies.
Other assets that appear in the balance sheet are called long-term or fixed assets because
they're durable and will last more than one year. Examples of long-term assets include the
following.
O Capital and plant is the book value of all capital equipment and property (if you own the land
and building), less depreciation.
O
O nvestment includes all investments owned by the company that can't be converted to cash in
less than one year. For the most part, companies just starting out have not accumulated long-
term investments.
O
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O Miscellaneous assets are all other long-term assets that are not "capital and plant" or
"investment."
"Total long-term assets" is the sum of capital and plant, investments, and miscellaneous assets.
"Total assets" is the sum of total current assets and total long-term assets
After listing the assets, you then have to account for the liabilities of your business. Like assets,
liabilities are classified as current or long term. Debts that are due in one year or less are
classified as current liabilities. f they're due in more than one year, they're long-term liabilities.
Here are examples of current liabilities:
O Accounts payable include all expenses incurred by the business that are purchased from
regular creditors on an open account and are due and payable.
O
O Accrued liabilities are all expenses incurred by the business that are required for operation
but have not yet been paid at the time the books are closed. These expenses are usually the
company's overhead and salaries.
O
O Taxes are those payments still due and payable at the time the books are closed.
"Total current liabilities" is the sum of accounts payable, accrued liabilities and taxes.
Long-term liabilities include the following:
O Bonds payable is the total of all bonds at the end of the year that are due and payable over a
period exceeding one year.
O
O Mortgage payable is loans taken out for the purchase of real estate that are repaid over a
long-term period. The mortgage payable is that amount still due at the close of the fiscal year.
O
O Notes payable are the amounts still owed on any long-term debts that won't be repaid during
the current fiscal year.
O
"Total long-term liabilities" is the sum of bonds payable, mortgages payable and notes payable.
"Total liabilities" is the sum of total current and long-term liabilities.
Balance sheet:


Definition
quantitative summary of a company's financial condition at a specific point in time, including assets,
liabilities and net worth. The first part of a balance sheet shows all the productive assets a company
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owns, and the second part shows all the financing methods (such as liabilities and shareholders'
equity). Also called statement of condition.


Definition
ondensed statement that shows the financial position of an entity on a specified date (usually the last
day of an accounting period). mong other items of information, it states (1) what assets the entity
owns, (2) how it paid for them, (3) what it owes (its liabilities), and (4) what is the amount left after
satisfying the liabilities. Balance sheet data is based on a fundamental accounting equation (assets =
liabilities + owners' equity), and is classified under sub-headings such as current assets, fixed assets,
current liabilities, Long-term Liabilities. With income statement and cash flow statement, it comprises
the set of documents indispensable in running a business. n audited balance sheet is often demanded
by investors, lenders, suppliers, and taxation authorities; and is required by law under the corporate
legislation (such as the ompanies ct). To be considered valid, a balance sheet must give a 'true and
fair view' of the entity's state of affairs, and must follow the provisions of G! in its preparation.
alled also statement of condition, statement of financial condition, or statement of financial position.
The income statement:
lncom sLaLmnL ls us mor frunLly lnvsLors noL only Lo asss currnL managmnL
prformanc buL also a gul Lo companls fuLur proflLablllLy

n accounting of sales, expenses, and net profit for a given period.


A business financial statement that lists revenues, expenses, and net income throughout a given period.
Because of the various methods used to record transactions, the dollar values shown on an income
statement often can be misleading. Also called earnings report, earnings statement, operating
statement, profit and loss statement.
An income statement, also called a profit and loss statement, shows the revenues from business
operations, expenses of operating the business, and the resulting net profit or loss of a company over a
specific period of time.
Define its purpose. The income statement represents a company's financial performance for a given period of time. n
other words, it outlines the revenue or sales earned as well as the liabilities or debts incurred in a month, quarter or
year. This information helps decision-makers plan for the future
4 The cash flow statement:
@ Llr flnanclal of a company slgn Lo Lrack L flow of cas Lroug L flrm
4

1) Cas from opraLlng acLlvlLy
2) Cas from lnvsLlng acLlvlLy
3) Cas from flnanclng acLlvlLy
7ee cash flow:
A masur of cas avallabl Lo flrm us ln valuaLlon mols
Analyzlng company proflLablllLy
LS 8CL *8ook valu pr Sar
8CL rLurn on ulLy
8CCk vALuL L8 SPA8LaccounLlng valu of sLockolr ulLy
5 #etu7n on equity:
ome > Dictionary
Return On Equity - ROE

Formula for Return on Equity
The Iormula Ior Return on Equity is: Net ProIit Average Shareholder Equity Ior Period Return on Equity
at Does Return On Equity - ROE Mean?
@ amounL of nL lncom rLurn as a prcnLag of sarolrs ulLy 8Lurn on ulLy masurs
a corporaLlons proflLablllLy by rvallng ow muc proflL a company gnraLs wlL L mony
sarolrs av lnvsL

8CL ls prss as a prcnLag an calculaL as

keturn on Lqu|ty Net Income]Shareho|ders Lqu|ty

hy #etu7n on Equity s mpo7tant:
A business that has a high return on equity is more likely to be one that is capable oI generating cash
internally. For the most part, the higher a company's return on equity compared to its industry, the better.
This should be obvious to even the less-than-astute investor II you owned a business that had a net worth
(shareholder's equity) oI $100 million dollars and it made $5 million in proIit, it would be earning 5 on
your equity ($5 $100 .05, or 5). The higher you can get the "return" on your equity, in this case 5,
the better.


nL lncom ls for L full flscal yar (bfor lvlns pal Lo common sLock olrs buL afLr lvlns
Lo prfrr sLock) Sarolrs ulLy os noL lnclu prfrr sars
Also known as rLurn on nL worL (8CnW)
@ accounLlng raL of rLurn on sLak olr ulLy
Analyzlng 8Lurn on ulLy
8CL 8CA *LLvL8ACL
8CA rLurn on flrm assLs @ accounLlng raL of rLurn on flrm assLs
Using FOE csiimaiing iIc inicrnal 8:89,3,-0 growiI
raic.
efine sustainable g7owth 7ate:
A firm expected growth rate in earning and dividend. often calculated as the product of ROE and the
retention rate of earning.
g=roe*(1-pay out ratio)
Sustainable Growth Rate - SGR

What Does Sustainable Growth Rate - SGR Mean?
The maximum growth rate that a firm can sustain without having to increase financial leverage.
Calculated as: ROE x (1 - dividend-payout ratio)
nvestopedia explains Sustainable Growth Rate - SGR
The sustainable growth rate is a measure of how much a firm can grow without borrowing more money. After the firm
has passed this rate, it must borrow funds from another source to facilitate growth.
6 nalyzing #etu7n on assets:
Return on Assets - ROA

hat oes #etu7n On ssets - #O Mean?
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how
efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings
by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".
The formula for return on assets is:





Note: Some investors add interest expense back into net income when performing this calculation because they'd like
to use operating returns before cost of borrowing.
Ea7nings Estimate:
WaL uos Larnlngs LsLlmaL Man?
An analysLs sLlmaL for a companys fuLur uarLrly or annual arnlngs
LxLAlnS LA8nlnCS LS@lMA@L
AnalysLs us forcasLlng mols managmnL gulanc an funamnLal lnformaLlon on L company
ln orr Lo rlv an sLlmaL
Ea7nings estimate:
WXZ`[Z
@ pcL uarLrly or annual arnlngs of a glvn company as sLlmaL by an analysL or oLr
markL lnlvlual or company Larnlngs sLlmaLs ar waLc closly by lnvsLors bcaus Ly ar an
lmporLanL lnlcaLlon of L companys ouLlook buL vn L profsslonals av lfflculLy prlcLlng
arnlngs accuraLly







8 THE P/E #TO {P#CE E# #TO:
@ /L raLlo lnlcaL ow muc pr ollar of arnlng lnvsLors currnLly ar wllllng Lo pay for a sLock LaL ls L
prlc for ac ollar of arnlng


rlcLarnlngs 8aLlo /L 8aLlo

WaL uos rlcLarnlngs 8aLlo /L 8aLlo Man?
A valuaLlon raLlo of a companys currnL sar prlc compar Lo lLs prsar arnlngs

CalculaL as




lor ampl lf a company ls currnLly Lralng aL $43 a sar an arnlngs ovr L lasL 12 monLs wr
$19 pr sar L /L raLlo for L sLock woul b 220 ($43/$19)

LS ls usually from L lasL four uarLrs (Lralllng /L) buL somLlms lL can b Lakn from L sLlmaLs
of arnlngs pcL ln L nL four uarLrs (pro[cL or forwar /L) A Llr varlaLlon uss L sum
of L lasL Lwo acLual uarLrs an L sLlmaLs of L nL Lwo uarLrs

WaLc L 8aLlo

Also somLlms known as prlc mulLlpl or arnlngs mulLlpl
LxLAlnS 8lCLLA8nlnCS 8A@lC /L 8A@lC
ln gnral a lg /L suggsLs LaL lnvsLors ar pcLlng lgr arnlngs growL ln L fuLur
compar Lo companls wlL a lowr /L Powvr L /L raLlo osnL Lll us L wol sLory by
lLslf lLs usually mor usful Lo compar L /L raLlos of on company Lo oLr companls ln L sam
lnusLry Lo L markL ln gnral or agalnsL L companys own lsLorlcal /L lL woul noL b usful for
lnvsLors uslng L /L raLlo as a basls for Llr lnvsLmnL Lo compar L /L of a Lcnology company
(lg /L) Lo a uLlllLy company (low /L) as ac lnusLry as muc lffrnL growL prospcLs


@ /L ls somLlms rfrr Lo as L mulLlpl bcaus lL sows ow muc lnvsLors ar wllllng Lo
pay pr ollar of arnlngs lf a company wr currnLly Lralng aL a mulLlpl (/L) of 20 L
lnLrprLaLlon ls LaL an lnvsLor ls wllllng Lo pay $20 for $1 of currnL arnlngs
lL ls lmporLanL LaL lnvsLors noL an lmporLanL problm LaL arlss wlL L /L masur an Lo avol
baslng a clslon on Lls masur alon @ nomlnaLor (arnlngs) ls bas on an accounLlng masur
of arnlngs LaL ls suscpLlbl Lo forms of manlpulaLlon maklng L uallLy of L /L only as goo as
L uallLy of L unrlylng arnlngs numbr
THE PE #TO:
Som lnvsLor lvls L /L raLlo by L arnlng growiI raic io oliain iIc cg raiio.
LC 8A@lC /L/C
uflnlLlons of LC raLlo
@ LC raLlo (rlc/Larnlngs @o CrowL raLlo) ls a valuaLlon mLrlc for Lrmlnlng L rlaLlv Lra
off bLwn L prlc of a sLock L arnlngs gnraL pr sar (LS) an L companys pcL
growL
rlc/Larnlngs Lo CrowL LC 8aLlo

hat oes P7ice/Ea7nings To 7owth - PE #atio Mean?
A raLlo us Lo Lrmln a sLocks valu wll Laklng lnLo accounL arnlngs growL @ calculaLlon ls as
follows
LxLAlnS 8lCL/LA8nlnCS @C C8CW@P LC 8A@lC
LC ls a wlly us lnlcaLor of a sLocks poLnLlal valu lL ls favor by many ovr L prlc/arnlngs
raLlo bcaus lL also accounLs for growL Slmllar Lo L /L raLlo a lowr LC mans LaL L sLock ls
mor unrvalu

kp ln mln LaL L numbrs us ar pro[cL an Lrfor can b lss accuraL Also Lr ar
many varlaLlons uslng arnlngs from lffrnL Llm prlos (l on yar vs flv yar) 8 sur Lo know
L acL flnlLlon your sourc ls uslng