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Some of this post material is from the book: How I become a profitable trader after losing $30,000(by Koh Ming Shao), you can either buy the book online or borrow the book from the library(remember my tip on borrowing books from the library?)
So let’s get straight to the point!
A typical company financial statement is made up of 3 component
- Profit And Loss Statement
- Balance Sheet
- Cash Flow Statement
- The Profit and Loss Statement shows the company’s revenues and expenses over a particular period, usually a year
- To summarize, the Profit and Loss statement show how profitable the company is
- Below is an example of a Profit and Loss Statement/Income statement of Singpost (stock code: S08), refer to this link for the Profit and Loss statement from Singpost
- **refer to important
- Revenue is the amount of money a company earns through its business.
- A good company should see its revenue increase year by year
- It included those directly linked to product production, such as labor costs, materials, and overhead production.
- For example, for singpost, the sales cost refers to the electricity bill requiring the operation of the machinery, fuel for the transportation of workers, etc.(A little unsure about it myself also, as there are many factors affecting the costs of goods)
- The difference between revenue and cost of revenue. The number gives an indication of the company financial health
- Higher gross profit also indicates that the company can fend off competitors from the same industry
- With high gross profit, the company can pay for its operating costs and other expenses
- Hence, the more the better!
- Gross Profit=Revenue-Cost Of revenue
- This is the difference between the revenue and all of the expenses incurred for the cost of doing business(overhead)plus interest and depreciation.
- It represents the profitability of the company. Higher net profit may also mean that the company is able to price their product higher than their competitor
- However, if the company is constantly cutting its cost to drive up revenue, it is not a solid company as its revenue growth may have become stagnant
- Expenses spend on researching product and, service.
- The intention to develop a product or service that will provide income over the coming years, E.g. singpost researching on a new mail sorting machine
- Research development 2018: Nil
- Sum of all direct and indirect selling expenses and all (G&A) of a company
- E.g corporate and sales or marketing salaries, commissions, advertising and any promotional materials
- Selling general and administrative 2018:$147,624,000
- Unusual charge, expense, or loss that is unlikely to occur again(one time off payment)
- This include lawsuit payments and moving expenses
Total operating expense
Income tax expenses
- The tax that the company have to pay to the government
- Minority interest refer to the minority stockholders(retail investor like you and me) shares holding
- The net income that the company earn after deducting the tax
- The balance sheet provides you with a snapshot of the company’s financial strength at the end of the accounting year. A balance sheet tells you what a company owns (Assets) and what the companies owe(Liabilities). It is divided into 5 component as follows
- Non-Current Assets
- Current Assets
- Current Liabilities
- Non-Current Liabilities
- Shareholder’s Equity
- Below is an example of a balance sheet
- Non-current assets are assets a company does not expect to convert into cash within the current year or may take longer than one year to sell
- Some examples of non-current assets are property, plant equipment, and vehicles. These assets are used to run the business, and can not be sold
- Current assets are assets that the company is expected to convert into cash, such as cash and short-term deposits (sometimes referred to as cash and cash equivalents or cash and bank balances), inventories, trading receivables, and money that the company is expected to collect as part of a project’s progressive payment (applicable to a project-based firm).
- Under current assets, a few important components you should know are:
- Cash & Cash Equivalents is the amount of money the company has in the bank. Remember, Cash is KING!
- If the company has more cash, it either means the company may not have to borrow or just borrow a little to run the business.
- Investors love investing in a company with little or no debt.
- With little or no borrowing, if the business is not profitable or growing, the companies will be spared from high interest expenses or the possibility of running debt repayment problems. .
- However, if the company sits on a pile of cash but does not return the cash to shareholders as a dividend or expand the business, the management does not make good use of the money and generate better returns for shareholders.
- Trade and other receivables also relate to commercial debtors.It is the monies that are own to the company by their customers.
- Like most businesses, their customers would be given credit terms as a gesture for an ongoing business relationship.
- Credit terms are given to their loyal customers such as 30 days, 60 days or even 90 days. Investors would like to see a reduction in trade and other receivables
- Rising trade receivables would mean that the company has trouble collecting creditors ‘ payments and would have a severe impact on the cash flow of the company.
- However, due to the nature of their business, some companies always have trade that is admissible on the high side. You will need to compare companies in the same sector to determine the trend
- Inventory refers to raw material, work-in-progress good and finished product that the company has yet to be sold off or delivered. Investors love to see the inventory moving quickly.
- The faster the stock is sold, the more income the company can generate.
- Current Liabilities are what the company owes and must be repaid with the current accounting year.
- These include trade and other payables (also known as commercial creditors), loans and borrowing, amounts due to clients for contracts and ongoing contract work (only applicable to a project-based company), and other financial obligations
- Non-current liabilities are what the company owes and will only be repaid after one year or more
- Shareholder equity refers to the company’s value or net worth.
- It basically means the money that is left if a company sold all of its assets and paid off all of its liabilities.
- This leftover money belongs to the shareholders, or the owners, of the company
- Equity= Assets -Liabilities
- The most important section of equity is retained earning also known as retained profits or accumulated profits.
- As the word suggests,, the company will retain retained earning for investment purposes, distribute them as a dividend or pay off its debt,.If the company is making losses, it will be called retained losses.
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