• We will begin with financial statements
analysis
• The SEC requires all companies that sell
securities to the public to disclose information
about the company’s operations and
performance
– For shareholders and analysts this is the primary
source of information about the company.
– Users can also rely on the regularity of the
reports, i.e., you can expect an update every
quarter
1
• Company filings can be accessed through the
SEC’s EDGAR database:
http://www.sec.gov/edgar/searchedgar/companysearch.html
2
• Three primary financial statements
– Balance sheet
– Income statement
– Cash flow statement
• Fourth statement
– Statement of shareholders’ equity
3
• Balance sheet
– Statement of the firm’s investments and who has
claims to the payoffs from those investments
– Lists assets, liabilities, and shareholders’ equity
• Assets – investments that are expected to generate payoffs.
– Current assets – assets that are expected to be converted to cash
within a year
• Liabilities – claims to the payoffs by claimants other than
shareholders (e.g. debt holders --- banks and/or bond
holders, suppliers)
– Current liabilities – cash will be needed to settle these claims
within a year
• Shareholders’ equity – claim by the owners.
– Balance sheet equation:
• Shareholders’ equity = Assets - Liabilities
4
• Let’s get SBUX’s latest annual financial statements
Type 10-K
Click on “Interactive Data”
5
Total Assets
Total Liabilities
Shareholders’ equity
6
• Income statement
– Displays the sources of net income
• Net income – “bottom line” measure of how
shareholders’ equity increased or decreased as a result
of business activities (we will also refer to business
activities as operations)
• Broadly speaking, Net Income = Revenues - Expenses
7
• Typical income statement format
Net revenue
- Cost of goods sold
= Gross profit
- Operating expenses
= operating income before taxes (EBIT)
- Interest expense
= Income before taxes
- Income taxes
= Income after tax and before extraordinary items
+ Extraordinary items
= Net income
- Preferred dividends
= Net income available to common shareholders
8
9
• Cash flow statement
– Describes how the firm generated and used cash
during the period
– Three types of cash flows
• Cash flow from operations – cash generated from
selling products minus cash used up to sell the products
• Cash flow from investing activities – cash spent on
buying assets to be used in operating activities minus
cash received from selling assets
• Cash flow from financing activities – cash transactions
to raise cash from debt (borrow) or equity (issue new
shares) minus cash paid to debt (pay debt) or equity
holders (dividends and/or repurchases)
10
11
• Statement of shareholders’ equity
– Explains how shareholders’ equity changed over
the period
• Ending equity = Beginning equity + Comprehensive
income – Net payout to shareholders
– Comprehensive income = Net income + Other comprehensive
income
– Shareholders’ equity
• Increases from earnings from business activities
• Decreases if there is a net payout to shareholders
– Net payout = Proceeds from share issues – Total payout
– Total payout = dividends+ repurchases
12
13