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

Apple: Are They Unstoppable?

October 22, 2008 | Filed in: Business/Entrepreneurship | 3 comments

Through my daily readings I came across several articles about Apple’s (AAPL) quarterly earnings report and was pleasantly surprised to find that even in the midst of an economic slowdown they made fantastic earnings and even broke a quarterly sales record for their flagship line of Macintosh computers.

Some of you are probably aware that I’m a recent convert to Apple (I bought a MacBook Pro in January of this year) and also that I hold several shares of AAPL stock in an investment portfolio.  I’m probably, then, slightly biased but I just can not help having a healthy level of adoration for this company.  They really seem to have their stuff together.

Apple is (according to AMR Research) the most well-run company in the world when it comes to supply chain management (see the Supply Chain Top 25).  They have an extremely healthy trio of products, between their iPods, iPhones and Macintosh Computers.  They have the support of many educational institutions far and wide and also the support of audio and visual professionals around the world.  They also have a devout following among “Apple geeks” in the computer world.

Honestly they’re one of my favorite companies, not only for their products but for the amount of respect that they deserve for the way that they run their business.  So then I was happy to find that their quarterly earnings report was better than expected.

The company posted revenue of $7.9 billion and net quarterly profit of $1.14 billion…

That quote is from Digital Daily and the remainder of the article can be found through the following link: AAPLause, Please.  I really like this quote from Steve Jobs which he said sometime during the earnings report.

We don’t yet know how this economic downturn will affect Apple. But we’re armed with the strongest product line in our history, the most talented employees and the best customers in our industry. And $25 billion of cash safely in the bank with zero debt.

What a great position to be in.  Zero debt and billions of dollars of cash just sitting in the bank. Like them or love them you have to admit that Apple is one very well run company.

Congratulations Apple on a great quarter (and year) and may your future be filled with all the success that you’ve found over the past several years.

Tags: Apple, Earnings Reports