Transcript Financial Statements

Financial Statements
The Income Statement
Crow River Investment Club
www.bivio.com/crowriver
Introduction to this Series
This is first of 4 short overviews
• 3 Main Financial Statements:
– Income Statement
– Balance Sheet
– Cash Flow Statement
• Finally, Annual Report Worksheets
– By Bob Adams
– By Paul Schneider
Income Statement: The Basics
1. Financial analysis is about Comparison.
That’s why these statements all come
with more than one year of data.
2. The Income Statement (or Profit & Loss
Statement) reports the income,
expenses and profits for a specific
period of time.
Income Statement: The Basics
3. Product Companies report “Net Sales”
4. Service Companies report “Net
Revenues.”
5. Net Sales & Revenues are the same
thing.
6. “Net” means after the return of
defective products.
Income Statement: The Basics
7. Everything on the Income Statement
can be expressed as a percentage and
compared to competitive companies.
8. Everything on the Income Statement
can be compared as a percentage to
Net Sales or Revenues.
Income Statement: The Basics
9. Companies are valued based on the
cash produced from “core” operations
(or Operating Income).
10.Focus your attention on the “core”
business. What business is the
company in? How much money did that
business generate or cost?
Income Statement: The Basics
11.Finally, be aware of income and
expenses that are “not” generated from
the “core” business.
12.If a company restructures, or takes onetime gains and losses annually, they are
no longer “one time”, are they??
The Anatomy of an
Income Statement
Net Sales or Revenues
- Cost of Goods Sold
= Gross Profit
Gross Profit divided by Sales =
Gross Margin, the percentage of
every dollar it costs to produce
sales.
Comparing Business Models
Let’s compare Mentor (MNTR) with Factset
(FDS) 2002 annual figures:
Net Sales
Cost of Sales
Gross Profit
MNTR
$321,062
$130,455
$190,607
FDS
$205,853
$ 67,947
$137,906
Gross Margin
59%
67%
Which one has a more profitable
business model?
What’s Next?
Other Operating Expenses, such as:
• Utilities
• Labor Costs
• Advertising
Then, Other Income & Expenses, such as:
•
•
•
•
•
Short-term Investments
Royalties on Patents
Payment on a Lawsuit
Foreign Exchange Rate deficit
Interest Income & Expenses
The Anatomy of an
Income Statement
SO…
Gross Profit
- SG&A Expenses
+ Other Income
- Other Expenses
= Income Before Income Taxes
This is an important SSG figure!
Taxes?
Why do we look at pre-tax income?
•
•
•
•
•
Companies have no control over taxes
Taxes vary from state to state
Taxes don’t show the true picture
Various industries are taxed differently
Tax credits skew year-to-year earnings
Taxes have their own line on the Income
Statement.
The Anatomy of an
Income Statement
So…
Income Before Taxes
- Provision for Income Taxes
= Net Income
The Anatomy of an
Income Statement
And…
• Net Income divided by Shares Outstanding =
Earnings Per Share or EPS
• Diluted Earnings Per Share:
The value of each share “after” the effects of
stock options and convertible shares and bonds
have been taken into consideration.
Income Statement Ratios
Which Ratios are Important?
Gross Margin:
Sales – Cost of Sales div. by Sales
• How profitable is this business model?
• Is it more profitable than its peers?
• Is it getting more profitable from year-to-year?
Income Statement Ratios
Which Ratios are Important?
Net Margin:
Net Income divided by Net Sales
• Is there any money left over for the shareholders
after all expenses and taxes are paid?
• Is Net Margin growing from year-to-year?
• How does it compare to its competitors?
Income Statement & the SSG
Sales
These are the items
required on the Quarterly
- Cost of Goods Sold
Data Update Screen &
- SG&A Expense
PERT Report
+Other Income
- Other Expenses
= Income Before Taxes
- Income Taxes
= Net Income (div. by Shares Outstanding)
= Earnings Per Share (EPS)
A Quick Look at FactSet
2002
2001
Change
Commissions
Cash Fees
Total Revenue
$ 62,196
$143,657
$205,853
$ 56,462
$120,226
$176,688
+ 10%
+ 19%
+16.5%
Cost of Services
SG&A Expenses
Total Op. Expenses
$ 67,947
$ 75,084
$143,935
$ 61,576
$ 64,209
$125,785
+ 10%
+ 17%
+ 14%
Net Income
Diluted EPS
Shares Outstanding
0%
$40,848
$ 33,401
+ 22%
$ 1.17
$
.96
+ 22%
34,862
34762
A Quick Look at FactSet
2002
Total Revenue
- Cost of Services
2001
$205,853
$ 67,947
$137,906
$176,688
$ 61,576
$115,112
Div. By Revenues =
Gross Margin
67%
65%
Net Income
Div. By Revenue =
$ 40,848
$205,853
$ 33,401
$176,688
Net Margin
19.8%
18.9%
Are they getting better!!?
Next Month: The Balance Sheet
The End