As an investor, you want to read a company’s integrated report, which includes commentary from management telling you about the year that has passed and plans for the year ahead. However, included in the integrated report are the company’s annual financia
Agood rule of thumb when looking at the income statement, the balance sheet, or the cash flow statement is to look for changes that seem out of the ordinary from year to year in any category.
For example, on the income statement, look first at revenues or operating income to determine if they went up or down.
If they increased, did they increase faster than last year and/or faster than the rate of inflation?
If sales lagged behind inflation, this could indicate the company may be having difficulty selling its products.
On the cash flow statement, look to see if cash has been increasing or decreasing over the past several years.
Look for other categories where the numbers seem out of line.
For example, has the company’s cash declined because the firm has launched an aggressive stock buyback programme, or invested in capital equipment that will yield future cash flows?
Accounts payable: Accounts payable are obligations that result from the acquisition of goods and services. Payables include purchases of raw materials – supplies, services, etc – on credit.
Accrued expenses or accrued liabilities: These are amounts owed for goods or services whose benefits have been received but will be paid for in the future. Typical accrued expenses are payroll, payroll taxes, property taxes, rent, royalties, interest, commissions, etc.
Preference shares: Some companies sell preference shares, which differ significantly from common stock. Preference shareholders are entitled to receive a fixed dividend before common holders, and have a priority in case the company is liquidated.
Retained earnings or reinvested earnings: When a company makes profits, it can reinvest the funds or return them to the owners (stockholders) as dividends. Retained earnings (sometimes called accumulated undistributed net income) are profits that have been reinvested since the company was founded. If the company experiences a loss for a quarter or year, it dips into retained earnings to cover the difference.
The balance sheet and income statement reflect the company’s performance under the accrual method (think of it as a way of keeping score.) But to get an accurate picture of the company, you need to know how it is handling its cash.
3THE CASH FLOW STATEMENT shows how cash moved through the company over the year and lets you see if the company’s cash position increased or decreased. It presents data for the past three years. Key components of the cash flow statement are:
Operating activities: This category focuses on what the company does as a business, and excludes investing and financing activities.
The primary entry for operating activities is net income.
Investing activities: This reflects payments for acquiring and disposing of long-term productive assets or businesses, and securities that are not considered cash equivalents.
Financing activities: This reflects the issuing or repurchasing of stock and debt, and paying of dividends.
Net change in cash and equivalents: increase or decrease in cash for the year.
Balance at beginning of the year: Cash balance at the start of the year.
Balance at the end of the year: the end of the year.
Free cash: This is one of the most important numbers for executives and analysts, yet you will see it on very few cash flow statements. You will find it in the glossy pages of the annual report for a few companies.
Free cash refers to the cash that is left after a company maintains its productive capacity by doing things such as modernising plants by purchasing new equipment or buying another business.
Free cash is obviously essential for a company’s ability to expand activities, pay down debt, etc. There is no one way to calculate free cash, although a common format involves subtracting capital expenditures from cash from operations. Shows the Cash balance at