Personal Finance Blog by Debit versus Credit

Investing for Beginners: Analyzing Financial Statements, pt. 2

November 5, 2008 | Filed in: Investing | 1 comment

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Today we’ll be continuing the Investing for Beginners series with an introduction to interpreting a companies Balance Sheet as well as their Statement of Cash Flows.  Let’s begin with the balance sheet.

The Balance Sheet

There are a lot more rows to this one eh? Don’t get intimidated, there is nothing to it! I promise.

Let’s start from the top. We’re looking at Apple’s balance sheet, which shows all of their assets, liabilities and their stockholder equity (sometimes known as owners equity). Just about everything listed on the balance sheet is pretty important but for simplicities sake we’ll just go over cash, receivables and inventory on the “assets side” plus accounts payable on the “liabilities side.” We’ll also look at Total Assets and Total Liabilities.

Breakdown of the Assets:

The cash and cash equivalents increased by 83% from the year ended 2006 over the year ended 2005. For the year ended 2007 their cash increased 46%. These are some fantastic numbers. There’s nothing much to worry about with the exponential decrease in cash from 2006 to 2007, as it’d be impossible to maintain such high increases YoY (year over year). Naturally you’re going to be wanting to look for a company that has increasing cash YoY on the assets side. If their cash does drop you’ll need a good reason why, otherwise it could be a warning sign that the company is struggling.

Now let’s take a look at receivables. These numbers can be somewhat deceiving, in that increasing receivables tends to imply increasing sales, but could just as well mean that a company is resorting to cheap financing tricks to “temporarily” boost their numbers. So be careful with this one. I happen to know that Apple truly is experiencing some vastly increasing sales numbers, so the increases in Receivables, while a little high, are not too far off. So what are the numbers? 2006 over 2005 saw an increase in receivables of 181% while 2007 over 2006 saw an increase of 39%.

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Tags: Accounting, Analyzing Financial Statements, Apple, Investing, Investing for Beginners

Investing For Beginners: Analyzing Financial Statements

October 29, 2008 | Filed in: Investing | 2 comments

Today I’ll be continuing the multi-part series Investing for Beginners.  Don’t forget to read the first part, Stock Market Basics if you haven’t already.  If you want to keep updated with new additions to the Investing for Beginners series then don’t forget to subscribe to the Debit versus Credit RSS feed.  Today I’ll be covering a little bit about Accounting, specifically how to analyze financial statements.

Now hold on!  Before you run away let me explain.

I realize that most of you are probably not especially fond of accounting, especially after having to endure the hell that is debits and credits. If you do enjoy accounting you are a member of a small minority and I congratulate you. As for the rest of us (myself included) accounting is much too tedious and sometimes even a little bit confusing. That’s not what we’re here for today, though. Today I will be teaching accounting, this much is true. I will only be teaching what is necessary for the dissection of financial statements, which can then be applied to researching a company that you might be interested in investing in. I promise it will be easy but more importantly it will be useful and FUN!

The only accounting that you should ever have to do when it comes to researching investments is as simple as reading existing financial statements.  I am going to provide examples of an income statement today and on the next update I’ll cover the balance sheet and cash flow statements.  I’ll point out what’s important and how you can use these statements to analyze how well a company is doing financially.

The Income Statement

With the Income Statement we want to pay attention to several numbers, with Gross Profit and Net Income being the most important.  This is an annual report which lists the Net Income for the years ended Sep 24 of 2005, Sep 30 of 2006 and Sep 29 of 2007.  This means that the income and other figures listed are from the fiscal year beginning in October and ending in September of the following year.

What do the numbers mean?  And what do we do with them?  There are some relatively obvious ways to dissect this Income Statement.  For example Apple’s net income for the year ended September 2007 was $3,496,000,000 ($3.5 billion) dollars.  If you compare this to the previous year ($1.9 billion dollars) then it seems that Apple is doing something right.  But we’re doing something wrong.  Comparing dollars to dollars isn’t usually the best way to read financial statements, as it’s akin to comparing apples and oranges - especially when trying to compare Apple’s net income against say Dell’s or Microsoft’s.  So how do we do it?

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Tags: Accounting, Analyzing Financial Statements, Apple, Investing, Investing for Beginners

The Worst Years of My (Financial) Life

October 26, 2007 | Filed in: Debt | No comment

I have a confession to make. It wasn’t very long ago that I experienced the worst few years of my life, financially speaking. In the latter-half of 2004 I began my adult life full-force, and I hate to admit, but I began it quite poorly. In not very much time at all I managed to get myself in thousands of dollars of credit card debt, which I discovered was a debt that would not easily go away. In my defense I was a full-time college student working part-time jobs to try and pay the bills, but playing the devils advocate it is obvious that I could have done more with the little money I made. I managed my money poorly for a time, but thankfully I’ve been able to learn from those mistakes. I’d like to share just a little bit with you on what I did wrong and, as cliché as it sounds, what I would do differently if I could do it all over again.

It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

It all actually started out pretty ironically. I told one of my friends in early 2004 that I wanted to save $30,000 by the end of the year 2005. In fact I almost did quite the opposite; I do believe by the end of 2005 I had around $15,000 - $20,000 worth of student loans and credit card debt. It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

Let the reckless spending begin

I started my freshman year of college in August of 2004 and due to certain circumstances I had no money to pay for my tuition. Doing what I figured was absolutely normal I borrowed some money from my brother to pay for my tuition. I started looking for a job at about that time also, realizing the need to repay my brother, but didn’t find anything steady for a few months. At that point I had applied for and received a credit card which I used to pay for my basic living expenses: gas, food and the like. I expected to pay off my credit card and my brother within a few months from the time I got my job, but instead I kept using my credit card and accumulating debt. I hadn’t done any budgeting and figured out how much I could afford to spend a month, and so I did what so many Americans do; I spent more than I made every single month. Within no time at all I had accumulated around $5,000 dollars worth of credit card debt, and I was beginning to feel as if I were drowning in debt. It was at this point that I began looking for a solution, but the solution I found was not a permanent one.

I wanted to cut down my credit card debt and figured I could take out some student loans to pay it off and then I could start fresh. This worked for a few months, but I still had not disciplined myself to live within my means, and when my lack of discipline was combined with the cost of tuition and books my credit card debt quickly climbed back up to its previous levels. This is when I decided to take on more student loans to pay down my credit card debt again, only this time unsubsidized loans with a higher interest rate. After I had racked up credit card debt and taken out student loans to pay it down a few times I finally realized the error of my ways and decided it was time for me get serious about my finances. To my credit I did fairly well with this at first, but eventually I managed to slip up again… and this time for even more than all of my student-loan debts combined.

New cars are great… if you want to throw your money away

I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

Yeah I did it, I bought a new car. Not just any new car though… I bought myself a 2006 Mitsubishi Eclipse back in March of the same year. Even though I had managed to accumulate a significant amount of student-loan debt at this point I had not yet made such a large financial mistake as I did when I purchased this car. Once all was said and done I had a loan in the mid to high 20’s and a car worth barely 20 thousand dollars. Viola! Instant 36% depreciation. I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

After this mistake I had had enough of my idiocy. I realized how poorly I had been managing my finances for the two prior years and I resolved to shape up. I concentrated on spending less so I could pay down my debts and save a little each month. I paid just a little extra on my car each month to try to get the principal balance down. I married a woman who knew how to save. I am proud to say that other than my student loans and my auto loan I am debt free. My wife and I have also managed to save between our 401(k)’s, a brokerage account and an emergency fund enough to almost completely pay off either my auto loan or my student loans.

If I could do it all over again I would have made myself a budget and stuck to it. I still would have had some student loan debts, but looking back I realize I could have avoided most, if not all, of my credit card debt and I could have my original auto loan almost completely payed off by now, had I not traded it in for a car two and a half times more expensive. I believe I would have been able to save a decent amount during that time. I would not have accomplished my goal of $30,000 in savings, due to my small income, but I would have accumulated some wealth if I had done these things. Mistakes are meant to be learned from, and I do believe that I have learned my lesson from these mistakes in my past.

What about you?

What financial mistakes have you made that you are not proud of, and what have you done to learn from them and/or correct them? I’d love to hear what you have to say!

Tags: Accounting, affordability, Budgeting, Debt, Discover, funds, Investing, wealth