Introduction to Financial Statement Analysis

00:11:12
https://www.youtube.com/watch?v=T3T8d5XvACk

Resumo

TLDRThe video provides an introduction to financial statement analysis, highlighting its significance in making key business decisions such as lending, investing, and supplying goods. It covers the three primary financial statements: the income statement, balance sheet, and statement of cash flows, explaining how they offer insights into a company's financial performance. The video discusses basic analysis techniques, such as examining revenue trends, and advanced methods like ratio analysis, including profit margin and return on assets. It also addresses the potential for financial manipulation and the importance of critically evaluating financial data to ensure accurate assessments of a company's health.

Conclusões

  • 📊 Financial statement analysis is crucial for business decisions.
  • 💰 It helps assess credit risk and investment potential.
  • 📈 The three main financial statements are income statement, balance sheet, and cash flow statement.
  • 🔍 Basic analysis involves examining revenue trends and profitability.
  • 📉 Advanced analysis includes ratio calculations and understanding profit margins.
  • ⚖️ Ratio analysis helps evaluate financial performance over time.
  • 🔄 Return on assets (ROA) measures efficiency in using assets.
  • ⚠️ Be aware of potential financial manipulation in statements.
  • 📉 Understanding the quality of earnings is essential for accurate assessments.
  • 🔧 Advanced techniques include Dupont analysis and common size statements.

Linha do tempo

  • 00:00:00 - 00:05:00

    The video introduces financial statement analysis, emphasizing its importance for making key business decisions such as lending money, supplying inventory, or investing in companies. It explains that financial statements provide insights into a company's past performance, helping investors and creditors assess credit risk and future profitability. The speaker highlights the three main financial statements: the income statement, balance sheet, and statement of cash flows, which together offer a comprehensive view of a company's financial health.

  • 00:05:00 - 00:11:12

    The discussion progresses to different levels of financial statement analysis, starting from basic observations of revenue trends to more advanced techniques like ratio analysis. The speaker explains how to calculate ratios such as inventory turnover and profit margin, and how these metrics can reveal deeper insights into a company's operations. Advanced analysis includes decomposing return on assets (ROA) and return on equity (ROE) to understand the factors driving profitability, as well as recognizing potential manipulation in financial reporting. The video promises to cover various analytical techniques and tools in future segments.

Mapa mental

Vídeo de perguntas e respostas

  • What is financial statement analysis?

    Financial statement analysis is the process of reviewing and evaluating a company's financial statements to make informed business decisions.

  • Why is financial statement analysis important?

    It helps assess credit risk, investment potential, and supplier relationships by providing insights into a company's financial health.

  • What are the three main financial statements?

    The three main financial statements are the income statement, balance sheet, and statement of cash flows.

  • What is the income statement?

    The income statement, also known as the profit and loss statement, shows a company's revenues and expenses over a specific period.

  • What does the balance sheet represent?

    The balance sheet presents a company's assets, liabilities, and equity at a specific point in time.

  • What is the statement of cash flows?

    The statement of cash flows details how a company generates and uses cash from operating, investing, and financing activities.

  • What is ratio analysis?

    Ratio analysis involves calculating financial ratios to assess a company's performance and financial health.

  • What is profit margin?

    Profit margin is a measure of profitability, indicating how much profit a company makes for every dollar of sales.

  • What is return on assets (ROA)?

    ROA is a financial ratio that indicates how efficiently a company uses its assets to generate profit.

  • What are some warning signs of financial manipulation?

    Warning signs include aggressive revenue recognition, unusual accounting estimates, and discrepancies in financial data.

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Rolagem automática:
  • 00:00:00
    in this video i want to introduce you to
  • 00:00:01
    the topic of financial statement
  • 00:00:03
    analysis
  • 00:00:04
    so financial statement analysis is very
  • 00:00:06
    important when making several key
  • 00:00:08
    business decisions
  • 00:00:09
    for example if you are thinking of
  • 00:00:12
    lending money to a company
  • 00:00:13
    and you're trying to decide whether that
  • 00:00:15
    company is a good credit risk or not
  • 00:00:16
    you want to know am i going to get my
  • 00:00:18
    interest payments and am i going to get
  • 00:00:20
    the principal repaid to me
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    or maybe you are a supplier to a company
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    and you want to know
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    hey should i ship them inventory on
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    credit
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    why would you be worried well what if
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    they never pay you what if you never get
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    the cash okay so suppliers are concerned
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    about this different
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    lenders maybe you're thinking of
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    investing in a company you're thinking
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    of buying stock in a company like
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    walmart
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    or google so you want to look at the
  • 00:00:43
    past performance of that company
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    which is given in their financial
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    statements to try and make predictions
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    about the future going forward what will
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    be the company's future sales what will
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    be their future profits okay
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    now why is financial statement analysis
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    so critical
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    in making these decisions because let's
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    take me for example
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    so i'm an investor i don't work at
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    walmart however
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    i don't know what's going on at walmart
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    i can't just talk to the ceo and be like
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    hey let's have a sit down
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    i'd like to know about the financial
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    performance because i'm thinking of
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    buying some more stock in walmart
  • 00:01:15
    i don't know what's going on i'm not an
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    insider at that company
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    so walmart being a publicly traded
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    company in the united states
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    they are required to put out financial
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    statements if they have to be audited by
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    an external auditor
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    and then investors like me can look at
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    those financials and
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    have an idea of how the company has
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    performed in the past
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    now that's no guarantee about how it's
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    going to perform in the future
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    but i can make judgments based on oh
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    sales have been increasing or sales have
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    been declining and i think this trend
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    will continue or reverse and so forth
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    okay
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    i don't work at google so if i'm
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    thinking of lending money to google
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    if i'm thinking of investing in google i
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    don't know
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    about google's actual perform i can't
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    sit down with the ceo and be like let's
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    talk about what's going to happen next
  • 00:02:01
    quarter
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    i don't know what's going on because i'm
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    not an insider at google
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    so these financial statements are like a
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    window
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    into a company and they give me a
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    picture of what is going on at this
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    company and what can i expect to happen
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    with respect to profits sales cash flows
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    in the future and so what financial
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    statement analysis when we talk about
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    that when you hear that term
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    we're really thinking about the three
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    main financial statements and we're
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    going to focus a lot on these in the
  • 00:02:27
    videos to come
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    think about the income statement which
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    is sometimes called the statement of
  • 00:02:32
    operations or just the p l statement
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    stands for
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    profit and loss okay so the income
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    statement
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    we've got the balance sheet which has
  • 00:02:40
    the company's assets liabilities and
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    equity accounts
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    okay per ifrs so international financial
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    reporting standards
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    that is called the statement of
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    financial position so the statement of
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    financial position
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    the balance sheet are the same thing
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    okay and then we've got the company's
  • 00:02:56
    statement of cash flows which is going
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    to tell us where is this
  • 00:02:59
    company getting its cash from is it from
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    their operations from business
  • 00:03:03
    operations or maybe it's financing maybe
  • 00:03:05
    they're borrowing cash that's where
  • 00:03:06
    a company needs cash otherwise they
  • 00:03:08
    can't be in business how would they pay
  • 00:03:10
    their employees how would they pay their
  • 00:03:11
    utilities and so forth
  • 00:03:12
    so we're going to focus a lot of time on
  • 00:03:15
    these financial statements and really
  • 00:03:16
    understanding them
  • 00:03:18
    so we can make predictions about the
  • 00:03:19
    future so i want to just give you an
  • 00:03:22
    idea about financial stem analysis kind
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    of where we're going the types of things
  • 00:03:25
    we can do
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    at the most basic level okay at the most
  • 00:03:29
    basic level of financial statement
  • 00:03:30
    analysis
  • 00:03:31
    you could just look at a company's
  • 00:03:32
    financials and here i've got financials
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    for walmart
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    i had the most recent uh you know annual
  • 00:03:37
    financials at the time i made this video
  • 00:03:39
    so you can look and just say okay our
  • 00:03:42
    sales growing
  • 00:03:43
    okay and so walmart actually has two
  • 00:03:46
    types of
  • 00:03:46
    operating revenue here we've got net
  • 00:03:48
    sales which is just selling inventory
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    then you see this membership and other
  • 00:03:52
    income that's because walmart also owns
  • 00:03:54
    sam's club and sam's club sells
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    memberships
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    but let's not focus too much on the
  • 00:03:58
    details right now let's just look at the
  • 00:04:00
    total revenue
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    and these amounts are in millions so we
  • 00:04:03
    see that
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    2019 teen 2020 2021 for the year fiscal
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    year ended january 31st each year
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    we see that the top line revenue for
  • 00:04:13
    walmart
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    okay so that increase went from 514
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    billion to 523 billion to 559 billion so
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    we see
  • 00:04:20
    an upward trend okay so revenues are
  • 00:04:22
    increasing so we can see that
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    from looking at their income statement
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    this is a basic love just looking at
  • 00:04:29
    just top line revenue what's going on we
  • 00:04:31
    can see whether they're profitable
  • 00:04:33
    yes they are okay we can now we look and
  • 00:04:35
    we can also see that profit decline and
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    we can ask why now that's a more
  • 00:04:39
    advanced level trying to figure out well
  • 00:04:40
    why exactly did the profit go down and
  • 00:04:42
    we'll get into that
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    now we can also get do they have any
  • 00:04:45
    debt now we're not going to see that on
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    the income statement we're going to see
  • 00:04:48
    that on
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    the balance sheet aka the statement of
  • 00:04:51
    financial position
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    and then we can use the statement of
  • 00:04:54
    cash flows to say well where are they
  • 00:04:55
    getting the cash from
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    is it their operations are they
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    borrowing money are they selling fixed
  • 00:05:00
    assets what's happening how are they
  • 00:05:01
    getting the cash now
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    that's when i say basic level i mean all
  • 00:05:05
    you do is look at the income statement
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    you look at the balance sheet you want
  • 00:05:08
    to know how much debt they have it'll
  • 00:05:09
    say current
  • 00:05:10
    debt long-term debt and so forth so
  • 00:05:12
    that's a basic level of analysis
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    but we go a little more intermediate a
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    little more deeper
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    we could start to compute some ratios
  • 00:05:19
    and we're going to talk a lot about
  • 00:05:21
    ratio analysis
  • 00:05:22
    with respect to financial statement
  • 00:05:23
    analysis very important tool
  • 00:05:25
    uh for analyzing financial statements
  • 00:05:27
    for example
  • 00:05:28
    how long does it take walmart to sell
  • 00:05:30
    their inventory
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    how many days okay so we can calculate
  • 00:05:33
    something called inventory turnover
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    and then we can convert that to
  • 00:05:37
    something called days to sell inventory
  • 00:05:38
    so
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    i'm not going to speculate here on how
  • 00:05:41
    many days i haven't calculated for
  • 00:05:42
    walmart but let's just say that there
  • 00:05:43
    was a retailer in general
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    uh some retailer that it took them 73
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    days to sell their inventory
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    historically and then it went to one
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    year with 79
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    and then the next year was 88 you say
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    wait wait a minute uh
  • 00:05:58
    this is not a good trend why is it
  • 00:05:59
    taking that company longer and longer to
  • 00:06:01
    sell your inventory so then you would
  • 00:06:02
    have questions about that company like
  • 00:06:04
    what what is going on
  • 00:06:05
    are customers maybe not as excited about
  • 00:06:07
    this company's product anymore
  • 00:06:09
    what's happening you could look at uh so
  • 00:06:11
    again that would be the days of cell
  • 00:06:13
    inventory which is calculated from
  • 00:06:14
    inventory turnover which is a ratio
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    another ratio you can calculate is
  • 00:06:18
    profit margin okay so profit margin
  • 00:06:20
    we'll talk about profit margin is
  • 00:06:22
    for every hundred dollars or 100 euros
  • 00:06:25
    in sales
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    how much of that actually turns into
  • 00:06:28
    profit okay because remember sales are
  • 00:06:29
    very different from profit you might
  • 00:06:30
    have
  • 00:06:31
    100 or 100 euros in sales but only two
  • 00:06:33
    dollars or two euros
  • 00:06:35
    in profit and so then you would have a
  • 00:06:36
    two percent profit margin okay
  • 00:06:38
    so this if i say intermediate level
  • 00:06:41
    analysis we're not just looking at the
  • 00:06:42
    numbers on the financial statements
  • 00:06:44
    we're now calculating these ratios to
  • 00:06:46
    try and extract more meaning
  • 00:06:48
    from the the financial statements
  • 00:06:50
    thinking about uh we could express the
  • 00:06:51
    company's r d
  • 00:06:52
    research and development costs as a
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    percentage of the company's sales
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    and then we could look at well how does
  • 00:06:59
    that compare to what the competitors are
  • 00:07:00
    spending maybe they spend three percent
  • 00:07:03
    okay they spend three percent of their
  • 00:07:05
    of their sales on uh research and
  • 00:07:06
    development maybe all the
  • 00:07:07
    competitors are spending six or seven
  • 00:07:09
    percent we say well why isn't this
  • 00:07:11
    company spending as much
  • 00:07:12
    or maybe they're spending more than
  • 00:07:13
    their competitors and so forth and we
  • 00:07:15
    can look at the trend over time
  • 00:07:16
    there's lots of layers that we can deal
  • 00:07:18
    with here now
  • 00:07:20
    getting more advanced okay ratcheting up
  • 00:07:23
    in terms of
  • 00:07:23
    what can we do a financial statement
  • 00:07:25
    analysis we can look so one of the
  • 00:07:27
    ratios
  • 00:07:28
    that i didn't mention we think about roa
  • 00:07:30
    return on assets or roe you might have
  • 00:07:32
    heard of these
  • 00:07:33
    okay so roi uh excuse me roa let's focus
  • 00:07:36
    on just the company's net income
  • 00:07:38
    their bottom line profit divided by
  • 00:07:39
    their average assets
  • 00:07:41
    so if we take roa and we say okay maybe
  • 00:07:43
    roa is increasing
  • 00:07:45
    and we say well why is it increasing
  • 00:07:46
    well we can actually decompose roa
  • 00:07:49
    into two components we can decompose it
  • 00:07:51
    into something called asset turnover
  • 00:07:53
    and profit margin so asset turnover
  • 00:07:56
    times profit margin
  • 00:07:57
    is equal to roa and we could dig into
  • 00:07:59
    that and say okay well did roa increase
  • 00:08:01
    because profit margin increased or
  • 00:08:03
    because asset turnover increased or
  • 00:08:04
    maybe both of them increased maybe one
  • 00:08:06
    went down one went up whatever
  • 00:08:08
    we can also decompose roe okay we can
  • 00:08:10
    disaggregate it into its component parts
  • 00:08:13
    and see well what is really driving
  • 00:08:15
    increases in return on equity or
  • 00:08:18
    return on assets so that's dupont
  • 00:08:19
    analysis and we will talk about that
  • 00:08:22
    now in understanding why net income
  • 00:08:24
    increase or decrease you might think wow
  • 00:08:26
    if
  • 00:08:26
    you know a company's net income went up
  • 00:08:29
    it must be that they sold more product
  • 00:08:31
    well maybe
  • 00:08:32
    not not necessarily the case right maybe
  • 00:08:34
    sales were flat
  • 00:08:36
    okay maybe sales were flat but expenses
  • 00:08:39
    went down
  • 00:08:40
    so then it comes down to okay well what
  • 00:08:42
    expense was it
  • 00:08:43
    it was it an expense that the company
  • 00:08:45
    had some control over like
  • 00:08:46
    oh maybe it was cost of goods sold and
  • 00:08:48
    the company got better at bargaining for
  • 00:08:50
    like better prices from their suppliers
  • 00:08:52
    and you say oh good job you know the
  • 00:08:54
    company did a good job
  • 00:08:55
    but what if it was something like tax
  • 00:08:56
    expense and it was like oh well there
  • 00:08:58
    was a new law
  • 00:08:59
    uh you know think about like in the
  • 00:09:01
    united states for example when the tax
  • 00:09:03
    cut and jobs act come out it decreased
  • 00:09:04
    the corporate tax rate
  • 00:09:06
    so a lot of companies their tax expense
  • 00:09:08
    declined
  • 00:09:09
    so the profitability goes up and you say
  • 00:09:10
    like oh well if the company's
  • 00:09:12
    profitability goes up and i show you
  • 00:09:13
    that well 90
  • 00:09:14
    of that was due to just a decrease in
  • 00:09:16
    tax expense which the company really
  • 00:09:17
    didn't have any control over
  • 00:09:19
    it doesn't seem as impressive because
  • 00:09:20
    it's more external events
  • 00:09:22
    affected the company's profit and not an
  • 00:09:24
    improvement in the company's
  • 00:09:25
    business operations that's why it's this
  • 00:09:28
    advanced level we
  • 00:09:29
    i will show you how to take apart bit by
  • 00:09:32
    bit and what are all the various
  • 00:09:33
    components
  • 00:09:34
    that affected a company's net income why
  • 00:09:36
    did the net income go up or down
  • 00:09:38
    what were the you know seven eight nine
  • 00:09:40
    different things that happened okay now
  • 00:09:42
    we really want to dig deep when we talk
  • 00:09:44
    about advanced level
  • 00:09:45
    thinking about manipulation can't we
  • 00:09:48
    trust the numbers in the financial
  • 00:09:50
    statements remember that management has
  • 00:09:52
    a lot of opportunity there's
  • 00:09:54
    estimates that they make when we think
  • 00:09:55
    about like depreciation what will be the
  • 00:09:57
    useful life
  • 00:09:58
    of property planning equipment there's
  • 00:10:00
    accounting choice of which different
  • 00:10:02
    methods they can use
  • 00:10:04
    and then there's just you know companies
  • 00:10:06
    doing things like aggressive revenue
  • 00:10:08
    recognition where they're engaging in
  • 00:10:09
    channel stuffing and things like that
  • 00:10:11
    to artificially inflate the company's
  • 00:10:13
    sales so remember that the company
  • 00:10:15
    knows that you're going to be looking at
  • 00:10:17
    these financial statements and making
  • 00:10:18
    judgments about the company based on the
  • 00:10:20
    information in those financial
  • 00:10:22
    statements
  • 00:10:22
    so they have an incentive to make the
  • 00:10:24
    financial statements look better
  • 00:10:25
    sometimes than what they're actually the
  • 00:10:28
    business operations happen to be
  • 00:10:30
    and so i'm going to show you some ways
  • 00:10:32
    when we get into advanced level analysis
  • 00:10:34
    talking about what kind of manipulation
  • 00:10:36
    might you expect what are some warning
  • 00:10:38
    signs what are some things you might
  • 00:10:39
    look at
  • 00:10:40
    to you know see what what is going on
  • 00:10:42
    here wheels think about
  • 00:10:43
    what is the quality of the earnings
  • 00:10:45
    number that the company's putting out if
  • 00:10:46
    they say oh well we had you know 10
  • 00:10:48
    billion dollars
  • 00:10:49
    of net income well to what extent can we
  • 00:10:52
    trust that number
  • 00:10:53
    so we're going to do a lot of things i'm
  • 00:10:54
    going to show you how to make common
  • 00:10:55
    size uh
  • 00:10:56
    income statements we'll make trend
  • 00:10:58
    statements i'll show you dupont analysis
  • 00:11:00
    we'll calculate a ton of ratios and i'll
  • 00:11:02
    show you cause of change why didn't net
  • 00:11:03
    income go up
  • 00:11:04
    why did it go down how do we break that
  • 00:11:06
    down we're gonna do a ton of cool things
  • 00:11:08
    with financial statement analysis in the
  • 00:11:10
    videos to come
Etiquetas
  • financial statement analysis
  • income statement
  • balance sheet
  • statement of cash flows
  • ratio analysis
  • profit margin
  • return on assets
  • financial manipulation
  • business decisions
  • financial health