Transcript The Balance Sheet

The Balance Sheet
Crow River Investment Club
May 13, 2003
References
Starting and Running a Profitable
Investment Club – Thomas E. O’Hara
Kenneth S. Janke, Sr.
The Motley Fool Investment Workbook
A Balance Sheet (in this case, Lowe’s)
www.investorwords.com
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Agenda
Definitions
What is a balance sheet?
What do the terms mean?
Analysis
What do I look for?
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What is it?
Reports the financial condition of a company
at a specific point in time
Required to report every three months
Three key areas:
Assets (What it owns)
Liabilities (What it owes)
Shareholders’ equity
Assets = Liabilities + Shareholders’ Equity
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Basic Terms - Assets
Current Assets
Can be turned into cash quickly (within 12
months)
Examples
•
•
•
•
Cash, investments
Accounts Receivable (Bills due to the company)
Inventories
Interest payments on cash in the bank
Growth in these
areas should
generally not
outpace sales
Fixed Assets
Also long-term assets, property, plant, and
equipment
Depreciation
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Assets Example - LOW
Current Assets:
Cash and Cash Equivalents
Short Term Investments
Accounts Receivable – Net
Merchandise Inventory
Deferred Income Taxes
Other Current Assets
Total Current Assets
Property (Less Accumulated Depreciation)
Long-Term Investments
Other Assets
Total Assets
FY02
$853
$273
$172
$3968
$58
$244
$5568
$10352
$29
$160
$16109
FY01
$799
$54
$166
$3611
$93
$197
$4920
$8653
$22
$141
$13736
Basic Terms – Liabilities
Current Liabilities
Cash the company must pay in the next 12
months
• Examples




Accounts Payable (Bills the company owes)
Lease payments, short-term loans
Accrued Taxes
Accrued wages, interest, and other expense
Long-term Liabilities
Debt due in the years ahead vs. the current year
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Liabilities Example - LOW
Current Liabilities:
Short Term Borrowings
Current Maturities of LT Debt
Accounts Payable
Employee Retirement Plans
Accrued Salaries and Wages
Other Current Liabilities
Total Current Liabilities
LT Debt (Excluding Current Maturities)
Deferred Income Taxes
Other LT Liabilities
Total Liabilities
FY02
$50
$29
$1943
$88
$306
$1162
$3578
$3736
$478
$15
$7807
FY01
$100
$59
$1715
$126
$221
$796
$3017
$3734
$305
$6
$7062
So what?
What’s good?
Plenty of cash
Non-cash current assets
that are dropping
Rising current liabilities
(unpaid bills for which
cash is on hand)
It’s better if the company
is holding onto cash as
long as possible
What’s bad?
Rising Inventories
Rising receivables
Basic Terms – Shareholders’ Equity
Represents the ownership of the company
Common Stock
Preferred Stock
Surplus
Capital or Paid-in surplus
Retained Earnings or Earned Surplus
Prepaid Expenses or deferred charges
Intangible Assets
Reserves for contingencies
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Shareholders’ Equity Example - LOW
Shareholders’ Equity:
Preferred Stock - $5 Par Value, none issued
Common Stock - $.50 Par Value
Shares Issued and Outstanding
January 31, 2003 782
February 1, 2002 776
Capital in Excess of Par Value
Retained Earnings
Accumulated Other Comprehensive Income
Total Shareholders’ Equity
Total Liabilities and Shareholder’s Equity
FY02
FY01
$391
$2023
$5887
$1
$8302
$16109
$388
$1803
$4482
$1
$6674
$13736
What to Look For
Working Capital – do they have liquidity to build their business?
= Current Assets – Current Liabilities
Current Ratio (Also Working Capital Ratio)
= Current Assets/Current Liabilities
Acid Test – excluded inventory and therefore focuses on short-term
obligations
Inventory Turnover
= COGS/Average Inventory at Cost
If it’s increasing – it means the company is selling faster
Plant Turnover
= Sales/(Property, Plant, and equipment)
Book Value – more important to value investors
= Stated Value of the common stock + retained earnings + surplus
reserves
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What to Look For
Bond Ratio – 30-40%+ is bad
Preferred Stock Ratio
Common Stock Ratio
Leverage
Ratio of bonds to preferred stock
Long-Term Debt/Equity Ratio
Shows how much creditors own versus
shareholders
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Ratio’s and Analysis Examples
 Working Capital
FY02: $8302
FY01: $6674
 Current Ratio (Also Working Capital Ratio)
FY02: 2.1
FY01: 1.9
 Book Value
FY02: 6278
FY01: 4870
 LT Debt/Equity Ratio
FY02: .45
FY01: .56
Next Month:
The Cash Flow Statement