How to Read Company Financial Statements (Basics Explained)
Summary
TLDRThe video explains the importance of analyzing a company's financial statements for potential investments, highlighting the key components: the balance sheet, income statement, and cash flow statement. It emphasizes how many investors overlook these vital documents due to confusion, yet understanding them is crucial for assessing a company's financial health. The video breaks down each section of these statements, showing how they provide insights into a company's assets, liabilities, earnings, and cash flow. By mastering the basics, investors can make more informed decisions and avoid unnecessary risks.
Takeaways
- 🔍 Understanding a company's financial health is crucial for potential investors.
- 🚫 Many investors overlook financial analysis and focus solely on products and services.
- 📈 Financial statements are often misunderstood but are essential for assessing a company's health.
- 📚 The basics of financial statements are not complicated and can be quite revealing.
- 📋 The main financial statements include the balance sheet, income statement, and cash flow statement.
- 💼 The balance sheet provides a snapshot of assets, liabilities, and equity at a specific point in time.
- 💵 Assets are categorized as current or non-current, and liabilities are current or non-current.
- 📊 The income statement shows a company's earnings and expenses over a period, not just a snapshot.
- 💹 The cash flow statement is critical for understanding a company's liquidity and solvency.
- 🌐 Financial statements may vary slightly by company, industry, or country but generally follow similar formats.
- 💡 Investors are encouraged to read financial statements from various industries to enhance their understanding.
Q & A
What is the importance of analyzing a company's financial statements before investing?
-Analyzing a company's financial statements is essential for understanding its past, current, and potential future financial situation. This analysis helps investors make informed decisions rather than taking unnecessary risks based on products or services alone.
Why do many investors avoid analyzing financial statements?
-Many investors avoid analyzing financial statements because they find them complex and full of numbers, which can be confusing or intimidating. However, with a basic understanding, financial statements are not as complicated as they might appear.
What are the three main financial statements typically included in a company's financial report?
-The three main financial statements are the balance sheet, the income statement, and the cash flow statement. These provide an overview of the company's financial health from different perspectives.
What is the purpose of a balance sheet?
-The balance sheet provides a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It helps investors understand the company’s financial position, including its liquidity and overall stability.
How is the balance sheet structured?
-The balance sheet is divided into five sections: current assets, non-current (or long-term) assets, current liabilities, non-current (or long-term) liabilities, and equity. These sections show what the company owns, owes, and the shareholders' stake.
What is the difference between current and non-current assets?
-Current assets are expected to be used or sold within one year, including items like cash and inventory. Non-current assets, on the other hand, are long-term and not expected to be sold or used within the year, such as property and equipment.
What does the income statement show?
-The income statement shows the earnings and expenses of a company over a specific period of time, detailing the company's financial performance. It covers items like gross profit, operating income, and net income after taxes.
How does the income statement differ from the balance sheet?
-The balance sheet is a snapshot of the company's financial position at a specific point in time, while the income statement tracks the company's financial performance over a specific period, detailing how much revenue and profit the company generated.
What is the purpose of the cash flow statement?
-The cash flow statement provides information about the cash inflows and outflows during a period, showing the company’s liquidity. It helps investors assess whether the company has enough cash to meet its obligations and continue operations.
What are the three main sections of a cash flow statement?
-The cash flow statement is divided into three sections: cash flow from operations (day-to-day activities), cash flow from investing (acquisition and disposal of long-term assets), and cash flow from financing (borrowing and equity transactions).
Outlines
🔍 Importance of Financial Statements in Investment Analysis
The first paragraph highlights the significance of understanding a company's financial health for investment purposes. Many investors skip analyzing financial statements, focusing only on products and services, which leads to unnecessary risks. The complexity of financial statements often deters investors, but once basic knowledge is gained, analyzing them can become an insightful and straightforward process. The video promises to explain the essentials of financial statements to help viewers understand a company's financial health, using Tesla's quarterly results as an example.
📊 The Balance Sheet: Assets, Liabilities, and Equity
This paragraph introduces the balance sheet, which provides a snapshot of a company’s financial standing by detailing assets, liabilities, and equity. It explains how the balance sheet is structured into five main sections: current assets, non-current assets, current liabilities, non-current liabilities, and shareholders' equity. Each of these sections is defined with examples like cash, inventory, long-term debt, and equity representing the company's net worth. The balance sheet reflects the accounting equation, where assets equal liabilities plus equity.
📈 The Income Statement: Tracking Performance Over Time
The third paragraph focuses on the income statement, which shows a company's revenue and expenses over a specific period, helping investors assess financial performance. It explains the key components such as gross profit, operating income, and income before and after taxes. The income statement contrasts with the balance sheet by presenting financial activities over time, not just at a single point. Multi-step income statements, often used by listed companies, separate operating from non-operating activities, showing both earnings and costs associated with running the business.
💵 The Cash Flow Statement: Understanding a Company's Liquidity
The fourth paragraph details the cash flow statement, which provides crucial information about a company’s liquidity and solvency. It explains how this statement shows the cash coming in and going out, ensuring a business can meet its obligations. It is divided into three sections: cash from operations, cash from investing activities, and cash from financing activities. Each section tracks different aspects of a company's cash flow, ensuring that investors can understand how much cash is on hand for the company to meet its financial commitments.
📝 Wrapping Up: Understanding Financial Statements
The final paragraph provides a summary of the three major financial statements: the balance sheet, the income statement, and the cash flow statement. It encourages viewers to download and analyze financial statements from various companies to understand how they differ by industry. The video aims to give viewers a solid foundation in reading these documents and offers further resources, like a video on Warren Buffett, for those interested in advancing their financial analysis skills.
Mindmap
Keywords
💡Financial Statements
💡Balance Sheet
💡Income Statement
💡Cash Flow Statement
💡Assets
💡Liabilities
💡Shareholders' Equity
💡Gross Profit
💡Operating Income
💡Liquidity
Highlights
Understanding a company's past, current, and future financials is crucial for potential investment analysis.
Many investors overlook financial statements and focus only on products and services.
Financial statements can seem complex, but they are not as difficult as they appear once the basics are understood.
A company's financial health can reveal opportunities or risks that might not be apparent from its products or services alone.
The three main financial statements are the balance sheet, income statement, and cash flow statement.
The balance sheet shows a company's assets, liabilities, and equity at a specific point in time.
Assets on the balance sheet are listed by liquidity, with current assets expected to be used or sold within a year.
Non-current assets like property and equipment are expected to be held for longer than a year.
Liabilities are split between current liabilities, due within a year, and non-current liabilities, due later.
Shareholders' equity shows the residual interest in the company after liabilities are deducted from assets.
The income statement shows earnings and expenses over a specific period, unlike the balance sheet, which is a snapshot.
Cash flow statements reveal how much cash a company has on hand and its liquidity.
Cash flow is divided into three sections: operations, investing, and financing.
A good grasp of financial statements allows investors to better understand the company's operations and financial health.
Analyzing different financial statements from various industries can improve understanding of how companies operate.
Transcripts
an important part of analyzing a company
for a potential investment is
understanding their past current and
potential future financial situation
unfortunately a lot of investors skip
past this part and focus just on the
products and services the company offers
and whether they feel that they have a
good future or not and we're not even
talking about Wall Street bears Yolo
type investors either we're talking
about everyday investors who take
unnecessary risks by not looking into
the financial health of the companies
they're investing in the most common
reason for this is that they don't
understand the financial statements and
that's quite understandable because
they're full of numbers strangely worded
items and can seem a bit confusing or
complicated but in reality they really
aren't so complicated at all and are
nothing to be afraid of in fact once you
know the basics it can actually be quite
interesting to dive into the financial
statements of a company and analyze how
the company's being run and any
potential opportunities or threats that
there may be there are a number of
different ways to analyze the financial
statements but before you get to that
stage you need to know how to read them
so you know what it is that you're
looking at in this video we all go
through the basics of a financial
statement and explain the key sections
so you can see how straightforward it
really is now as I'm sure you can see
from the length of this video we're not
going to go into detail about absolutely
everything but we're just going to go
through the main sections so you can get
a good understanding and in any case
most of the items once you understand
how these statements work are pretty
self-explanatory they're actually
labeled and you can figure out what it
is that they're showing you as an
example for this video we'll be looking
at the latest quarterly results from
Tesla now it's important notes that
financial statements may differ slightly
depending on the company or the industry
or the country they report in however
for us listed companies like Tesla the
financial statements would be included
in the 10k and 10-q filings which are
mandatory for all publicly traded
companies in the US by the SEC the 10k
is an annual statement and the 10-q is
quarterly the 10k will provide more
information about the company and it is
audited so the information you see in it
will be more dependable and more
accurate but let's take a look at what
Tesla provided in its most recent report
which was for the first quarter of 2020
the financial statements for company are
usually made up of three main statements
we have the balance sheet the income
statement and the cash flow statement
the balance sheet is typically the first
statement to appear and it gives a
snapshot of the company's assets
liabilities and shareholders equity at a
specific point in time these three
aspects make up what is known as the
balance sheet equation also known as the
accounting equation this stays that
asses are equal to liabilities and
equity the balance sheet is split into
five sections current assets non current
assets also known as long-term assets
current liabilities non current
liabilities
also known as long-term liabilities and
equity which is also known as
shareholders equity or shareholders
funds let's start by looking at the
assets these will be listed in order of
how liquid they are which means how
easily they can be changed or converted
into cash so current assets are assets
that are expected to be either used or
sold within the next year this will
include things such as cash cash
equivalents money owed by customers
inventory and goods and services that
have been paid for but not yet used the
non current assets are assets that are
not expected to be sold or used within
the next year Tesla includes things such
as leased vehicles and solar energy
systems but there are also more common
items also listed such as property
plants and equipment
along with Lisa's intangible in other
words non-physical assets and goodwill
the next section shows the liabilities
again we have current liabilities which
are the obligations that are due within
the next year and this includes things
like money owed to suppliers even money
that has been paid but the good or
service is yet to be delivered along
with the portion of long term debts that
has jude's be repaid this year then we
have the non current liabilities which
are obviously obligations that are not
you within the next year this includes
long-term debt and again money that's
received but the good or service has not
yet been delivered the last section is
equity which is often referred to as
shareholders equity or shareholders
funds you could think of this as being
whatever would be left over for
shareholders if all assets were
liquidated and all liabilities were paid
off
therefore if the figure is positive it
means the company has enough assets to
cover its liabilities and if it's
negative it means that it doesn't
shareholders equity will include
information about shares that were
issued any capital paid in by
shareholders paying for shares in the
company and retained earnings which is
money accumulated from the company's
earnings and kept in the company the
next financial statement is the income
statement this is also known by other
names including statement of operations
and profit and loss statement amongst
many others this statement is going to
show us that earnings and expenses of a
company over a specific period of time
this important to keep in mind the
balance sheet was a snapshot at a
particular point in time whereas the
income statement is looking at what
happens over a specific period of time
so the income statement is helping us to
see a company's financial performance
for that period companies will structure
the income statement differently but
listed companies like Tesla
we'll typically follow what we refer to
as a multi-step income statement which
separates the operation revenue and
expenses from those coming from a non
operating activity so we're looking at
gross profit operating income or loss
the income or lost before taxes and then
the income or loss after taxes to get to
the gross profit with typically look at
total revenue minus the cost of that
revenue so traditionally here you'll
have sales revenue and in the costs you
may have heard of the term cost of goods
sold so this gives us the gross profit
we can then look at operating expenses
things like research and development for
creating new products selling general
and administrative expenses which are
all the costs not directly involved in
production of a product or service but
needed of the day-to-day business
operations this will include things such
as rent salaries for executives and
other management expenses admin staff
and basically any non sales people so
ultimately we end up with our income or
loss from operations we can then look at
any interest paid or received to find
our income or lost before taxes and then
finally the income or loss after taxes
the third of the three major parts of a
financial statement is the cash flow
statement so the income statement that
we just looked at may show us the profit
or loss generated during a period but
that doesn't necessarily equal cash a
company will need cash to survive so the
cash flow statement is going to help us
by giving information about company's
liquidity and solvency solvency means
having enough funds or liquid assets to
make necessary debt payments and funds
the company's operations if the company
runs out of cash it could be insolvent
which is one of the main reasons for
businesses failing the cash flow
statement will tell us the amount of
cash or
- equivalents coming into the company or
leaving the company therefore showing us
how much cash is on hand for a company
to make is necessary payments the cash
flow statement is usually split into
three main sections cash from operations
cash from investing activities and cash
from financing activities
the first section shows us the cash flow
from the primary revenue generating
activities of a company so this includes
the company's products or services
things like cash from sales rent
payments salary payments and so on cash
flows from current assets and current
liabilities next are the cash flows from
investing activities the focus here is
on acquiring or getting rid of long term
assets this will show us outflows due to
investments made in things like property
and inflows when assets are sold however
this statement doesn't detail the
investments and so the quality of those
investments can't really be assessed and
finally we have the cash flow from
financing activities which shows us cash
coming in or going out due to any equity
capital or borrowings it tracks cash
flow between the company is owners
creditors and lenders including
stockholders so there you have it simple
wasn't it those are the main sections of
the three main statements that make up a
company's financial statements the
balance sheet the income statement and
the cash flow statement now we didn't go
into lots and lots of detail this was a
high-level overview but just by
understanding those main sections and
how the statements are laid out and how
they relate to each other in the jobs
they do you can already get a good grasp
of what's going on in the company and
you should now be able to read a
company's financial statement and
understand what you're seeing
I'd recommend downloading the financial
statements of companies from different
industries and seeing how they differ
from one another and whether you can
read them now and get a better
understanding of what's going on in
those specific companies and if you like
video and want to see more on this topic
such as how we can take this a step
further and use ratios to analyze the
financial statements then hit that
thumbs up button to let us know and if
you're looking for something to watch
next why not check out our legends of
investing video about the story of
Warren Buffett someone who reads more
financial statements than practically
anyone and as always if don't forget to
subscribe to the channel for more videos
and thanks so much for watching see you
soon
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