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

Stock Market Basics: Investing For Beginners

September 30, 2008 | Filed in: Investing | 3 comments

This is the first of a multi-part series entitled “Investing for Beginners”.  Over the next several parts of this series I’ll be covering basic skills needed for investing such as Accounting, Economics and Stock Market Basics.  Today I’ll begin with “Stock Market Basics”.

An accounting professor of mine once told me that if anyone wants to be successful with investing they can be.  “Stock Market Basics” truly are not a difficult thing to learn.  At its core the Stock Market is essentially a free market system, meaning that it’s based on forces pulling against each other; these forces are supply and demand.  As a beginning investor it’s important to remember that these pulling forces are based on several things, such as a companies fundamentals (revenue, profit, assets, liabilities), technical evaluation and even “acts of god.”  To be able to interpret these market forces and company profiles requires some knowledge in accounting and economics and also a desire to keep up on stock market and company news.  Thus “Stock Market Basics” can be learned by education, which is the foundation for success as an investor.

What Is The Stock Market?

I’ll liken the stock market to an auction.  If an auctioneer has 50 thingymajigs for sale he or she is likely to start the bidding out at a price that’s much lower than if he or she had only 1 thingymajig to sell.  The more the auctioneer has to sell (supply) the less they are probably going to sell for because buyers (or demand in this case) are limited (based on price, supply, etc).  The stock market is similar to this.  However instead of buying a product or service the buyer actually buys ownership in a company.

The way that the market works is actually strikingly similar to an auction.  Brokerage companies (companies through which you can purchase stock of other firms) often have representatives on the floor of all the major stock exchanges, such as the New York Stock Exchange (NYSE).  These representatives could be thought of as auctioneers.  They take orders from those who want to buy stock and they take orders from stockholders who want to sell their stock.  They then match up orders and, voila!  A stock trade has taken place.

So What Do I Do First?

In order to start trading stocks you’ll need to open an account with a brokerage firm such as Scottrade, Charles Schwab, Sharebuilder or Zecco.  I personally recommend Zecco as they offer 10 free trades a month with a balance of $2,500 or more in your brokerage account.  If you want to open an account at either Scottrade or Sharebuilder shoot me an e-mail.  I think they offer incentives for referring friends - both to the referrer and the refereed.  Joseph [at] DebitversusCredit [dot] com is my e-mail address.  If you’re interested in Zecco (my personal recommendation) then you can follow the affiliate link below to sign up.

Next you’ll want to think of a company that you want to invest in.  Ideally it should be something that you know a little bit about, or support as a company.  Then you would do some research on them.  For example (and we’ll use AAPL because it’s a favorite of mine) if I wanted to buy shares in Apple I would first do some research on the company to discover for myself if I think they will continue to be profitable in the future.  A good (but very general) rule of thumb is that as long as a company continues to increase their earnings they will continue to grow and so will the value of their stock.

Prices Fluctuate, So Don’t Panic!

It’s important to remember that even though over the long-run (we’re talking years, not months) the value of a stock is based almost entirely on fundamentals, the share price of a stock is still subject to irrationality and bubbles.  In other words if I were to buy 100 shares in AAPL today, expecting to hold it for 5 years before I sell it, I can expect that the share price will, over the days and the months, have its ups and its downs.  I should be confident, however, that my decision to purchase an ownership (through 100 shares of stock) in Apple will pay off in the long-run.

Investing is not something that should be taken lightly.  If a friend of yours gives you a tip that they think a certain stock is going to go way up, you probably shouldn’t listen to them.  For example, I had a friend who recommended I pick up some SIRI (Sirius Satellite Radio) years ago when they first signed on Howard Stern.  Back then the stock price was somewhere in the teens… today it’s a penny stock.  His “hunch” wasn’t right, and your friends’ hunches probably won’t be right either.  Don’t trust anyone except yourself, your gut and your wallet when it comes to investing.  This way if you make a stupid investment (and we all do at some point) you’ll have no one to blame but yourself AND you’ll be able to learn from your mistake.

This concludes part 1 of the Investing for Beginners series, Stock Market Basics.  Stay tuned for the rest over the next several weeks.  Make sure you don’t miss anything by subscribing to Debit versus Credit.

Tags: Investing for Beginners, Stock Market Basics