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ASSISTANT: Hey there! I'm Note Maven; your note-taking buddy. I'll help you make awesome notes from your course transcripts. Let's get started! 😊 USER: Headline: Fundamentals of Investing

Topic: financial statements

Transcript:

In this lecture, we're going to take a look at financial statements.

Now, I'm not going to have you look at financial statements, don't worry, but there's a few things

that you need to understand about how companies work.

If you're going to be an investor, meaning you're going to be an owner of a company.

Right.

Because when you're investing in the stock market, you are, in a way, an owner of one of these companies.

You understand how companies work now, even if you are a completely passive investor, because, again,

this course is built for passive and active investors.

If you want to be a fully passive investor, investing in a mutual fund or index, fund, a little bit

of money every month and not caring, you still have to understand because you have to understand this

fund that you're investing in, what types of stocks they're investing, and you want to understand

how the market works, how these companies work.

If you feel that the market is a bit overvalued or if it's undervalued and it's the right time to invest

more, little things like that can help you a lot in your investing career.

So and then if you want to be active, this is going to help you a lot because being active, meaning

you're going to make more decisions and those decisions are going to be based on things that the company

does or news or market environment.

So very important in any regardless of what you want to do, passive or active, it's very important

to understand how companies work.

OK, so financial statements, these are the financial statements are statements that public companies

are obliged they're obliged to release on a quarterly basis.

Why?

Because their owners, their shareholders need to know what's going on with the company.

So there are at least three types of statements, a balance sheet and income statement and a cash flow

statement and at release those at the end of each quarter.

So each three months they release a quarterly statement that says, you know, everything that happened

in the company.

Now, these statements, since these companies are public, they're verified by auditors.

These are accounting firms that come in and make sure that everything that they see in these statements

is correct, in fact.

OK, so there is three types of statements here.

We're going to look at them.

And this is a website that you can use to find the statements for US companies, for each company,

you might have different resources.

For each country you'll have the resources.

But for us, you can use this one and I'll use it in a better balance sheet.

What is the balance sheet?

Balance sheet is basically a report that shows the company's assets, liabilities and owners equities.

So assets is everything that the company owns, right.

Cash, building equipment, everything that's worth something.

And the assets are going to be equal to liabilities, which is any debt that the company has.

Plus equity and equity is basically, you know, shareholders equity, what the owners have put in.

So if the owner put in a million, let's say the owners put in 50 million dollars and maybe the company

went out and got a hundred and fifty million dollars loan from the bank, so they have two hundred million,

their assets are going to be equal to two hundred million.

So maybe they have it in cash, maybe they use it to buy some things, but they're going to be equal

to what they borrowed from the bank or from other people and what the owners put in.

Now, you can also switch this formula to put equity on this site.

Right.

And then or.

Well, you can leave equity on the site and put liabilities on the other side.

So then you're going to have equity equals assets and then you move the liabilities minus liabilities.

So equity equals assets, minus liabilities.

So and this is the same thing for you.

If you want to find your net worth, what is your net worth?

It's your you can you can replace equity by net worth.

Your assets are going to be equal to your liabilities plus your net worth.

For example, if you have a house and that house is worth two hundred thousand, if you sell right now

on the market and you still owe the bank one hundred and fifty thousand loan for this house, then your

equity is going to be equal to 50 K because that's how much your worth your your net worth.

Right.

So network is going to be equal to your assets, minus your liabilities, everything you own, minus

everything you all think.

And an example of a balance sheet would be something like this.

You're going to have current assets, cash, investment supplies, inventory, accounts receivable.

So things that you've already done, but you need to get paid for.

All of these are worth something, equipment, land, building.

So property and equipments, all of these things that's going to be your total assets.

Liabilities is, you know, accounts payable, which is payable, interest payable.

Everything that happened that you need to pay, that you owe long term liabilities, which is mortgages,

notes, bonds, bonds are like loans.

We're going to talk about those later.

But money, you all and then the rest is going to be your shareholders equity.

So common stock retained earnings money that was made that's kept in the company.

And you'll see that total liabilities at.

Equity is going to be equal to the assets.

OK, very simple here.

Now we're going to we're not going to get into financial statements and I'm going to tell you why.

But there are some ratios or numbers that we want to understand.

Like what our earnings what is EPS earnings per share?

You know, we don't understand these things because as an investor, you need to understand the income

statement.

Income statement is going to be called the earnings statement.

This is very popular, this report, this report on the company's financial performance.

This is the form where the earnings are disclosed.

This is everybody waits for this, right.

This firm will show the company's revenues, expenses and net profit.

So the earnings report is going to show how much revenue the company made, how much expenses they had

and what is their net profit, their earnings.

And everybody waits for that every quarter to see how much money each company made.

For example, Apple each quarter.

Everybody's waiting.

We'll see their earnings.

We'll see their earnings.

And so I didn't come to look like this.

It'll have something like sales revenue from something.

And that'll be your football revenues.

Then your expenses like salaries, rent, utilities.

And then in the end, you'll have your total expenses and you'll get your net profit.

For example, the last statement you'll see is going to be the cash flow statement.

This there's a typo here.

So this form, I'll have that removed.

This form also reports of the company's cash flow, cash entering the company and cash exiting the company.

Cash flow is divided into three parts, cash for core operations, investing and financing.

Now, the reason this is not a very popular, I guess, statement for the public, but analysts really

look at this because, you know, a company might show that they've made a lot of money in one year,

but they only made money because maybe they sold it plans.

So everybody thinks they've made a lot of revenue, but that revenue came from an non-current thing,

so it's not something that's going to happen all all of the time.

So people might think, oh, they made a lot of profit, they made a lot of income.

But now that cash didn't come from their corporations, it came from an investing or from financing.

Right.

So analysts are going to look at the cash flow to see where did this cash come from, the come from

their core operations or is it a nonrecurring event because they just sold the building.

So it's really separate the cash.

And that's an important statement for analysts.

So you'll have cash flow from operating.

So net income, you'll have a decrease in inventory.

All of these changes here and that will be from operations.

Then if you have a capital expenditure proceeds from sale of a property that will be like an investing

activity and financing will be if you're borrowing or if you're repurchasing shares, giving out dividends

that will affect the cash flow in the financing activity.

OK, so that being said, if I go on this website that was linked here and let me open it up here,

we can put Edgard, you go on this website here so all the companies in the US wanted the schools or

they released their statements.

They're posted on this website.

So the SEC puts them there so anybody can see them.

So if I want to look at well, let's say let's put Apple and I put a detent form, which here you are

going to see the report, the last report here.

And I click on this.

Look at this.

This is the type of forms you can have.

Often you'll have hundreds of pages and all these forms is going to be all the information.

You're going to be like, OK, well, the net sales and is going to be usually per quarters.

We have three months and they're showing you the other nine months.

But net sales, cost of products, operating expenses, you're going to have a bunch of different information

here, current assets.

So accounts receivables, total current receivables.

And you'll have them usually.

You'll often have them per quarter.

And so a lot of information.

You're not going to vote for this.

But analysts and portfolio managers are going to go through this information.

They're going to try and find like, OK, well, you know, Apple, how much money did they make this

year and how much money are they going to make next year at this growth rate?

You know, already now getting into different markets, are they now selling in China?

How how is the growth rate in China, how their new products are selling?

How is the new subscription for their music or whatever?

And they're going to analyze these things and try and figure out how much money this company is going

to be making.

Because as an investor, as an owner, you want to be invested in a company that's either making money.

Right.

You're not speculating here.

You're investing.

You're an owner.

You want to be investing in a company that's either making money right now.

Or that's going to be making money in the future, so oftentimes you you know, investors want to look

and make sure that the business that they're getting in is doing good.

Now, you're not going to do that because you're announced.

But it's important to note some of these ratios, the main ratios that are going to be reported on and

the articles are going to be written on and you know, the summaries in a way.

So I'm going to discuss this more and more as we go through the course.

You know how you are going to be viewing the fundamentals of a company, how that's going to impact

you, because we have to be real.

You're not going to be an analyst.

You're not going to spend a full time job looking at financial statements.

You're not actually going to look at financial statements at all.

But you want to know some ratios and numbers at a higher level that you can quickly look through and

figure out, you know, if something is extremely overvalued or undervalued and maybe you do want to

invest in overvalued companies.

We're going to talk about that more.

But, you know, these are the statements when you hear people talking about financial statements,

these are the statements that they're talking about. ASSISTANT: Fundamentals of Investing: Financial Statements

1. Introduction to Financial Statements:

   • As an investor, it is important to understand how companies work and how the market functions.

   • Whether you are a passive or active investor, knowledge of financial statements is crucial.

2. Types of Financial Statements:

   • Public companies are required to release three types of statements on a quarterly basis:

     a. Balance Sheet: It shows the company's assets, liabilities, and owner's equity.

     b. Income Statement: Also known as the earnings statement, it reveals the company's revenues, expenses, and net profit.

     c. Cash Flow Statement: This statement tracks the cash entering and exiting the company, categorized as operating, investing, and financing activities.

3. Balance Sheet:

   • The balance sheet displays the company's assets, liabilities, and owner's equity.

   • Assets include cash, investments, supplies, inventory, equipment, land, and buildings.

   • Liabilities encompass accounts payable, interest payable, long-term liabilities (mortgages, loans), and bonds.

   • Owner's equity represents common stock, retained earnings, and funds kept within the company.

   • The balance sheet follows the equation: Assets = Liabilities + Equity (or Equity = Assets - Liabilities).

4. Income Statement:

   • The income statement highlights the company's financial performance, including revenues, expenses, and net profit.

   • It is also known as the earnings statement.

   • Revenues indicate sales revenue from various sources, while expenses include salaries, rent, utilities, and other costs.

   • The net profit is calculated by subtracting total expenses from total revenues.

5. Cash Flow Statement:

   • The cash flow statement tracks the flow of cash into and out of the company.

   • It is divided into three categories: cash from core operations, investing activities, and financing activities.

   • Analysts closely analyze the cash flow statement to determine the source of cash, ensuring it is sustainable rather than a one-time event.

6. Accessing Financial Statements:

   • Financial statements of public companies are available on websites like the SEC's EDGAR.

   • These statements provide comprehensive information about a company's financials, including net sales, expenses, assets, and liabilities.

7. Importance of Understanding Financial Statements:

   • While investors may not have the time to analyze financial statements extensively, knowing key ratios and numbers can help in assessing the value and potential of investments.

   • Understanding essential financial ratios can aid in identifying overvalued or undervalued companies.

Note: This summary provides an overview of financial statements and their significance in investing. Further exploration of ratios and analysis will be covered in subsequent lessons.