Revenue section (When Every items here Up → good 👍🏻, Down → bad 👎🏻)
Revenue:
What does it tell us?
The amount of assets generated doing business. Mircrosoft invents Software and sell it to generate income
The relationship?
up good, down bad
Gross profit:
What does it tell us?
Gross profit is what’s left of revenue after subtracting direct costs
The relationship?
up good, down bad
Gross profit Margin :
What does it tell us?
tells further you how much of revenue is kept, after paying direct costs, relative to sales.
The relationship?
up good, down bad
Caterpillar kept nearly 23 cents of every dollar in revenue.
among the 500 companies in the Standard & Poor’s 500 index, the average gross margin is about 45.1
Earnings per share (EPS): Division of net income by the total number of outstanding shares
!!Operating income: Gross profit less operating expenses
Earnings before interest and taxes.
After you subtract cost of goods sold, operating expenses, and other expenses from revenue, what you’re left with is earnings before interest and taxes.
Expenses Section (When Every items here Up → bad 👎🏻, Down → good👍🏻)
Costs of goods sold (COGS): The cost of component parts of what it takes to make whatever it is a business sells
What does it tell us?
These are direct costs, meaning they are costs for items that may literally go into the products.
For example
Cost of goods sold, for many manufacturing companies, is the largest single cost of doing business. For instance, with an automaker, the cost of goods sold might include the cost of steel used to build the cars.
Operating expenses: Gross profit less operating expenses
Types of OE
- Marketing expenses:
- Research and development:
- Administrative expenses:
What does it tell us?
The OE are Indirect expenses incurred by companies as they conduct business, but may not go directly into the product.
Other expenses like Depreciation
Other expenses might include the cost to restructure a unit of the company, paying severance to lay off employees, or depreciation — accounting for wear and tear (see the sidebar, “Appreciating depreciation
Interest expense.
Most companies borrow money to fund their operations or to buy inventory. Here, the company how much it’s paying to borrow money for
Net Earnings or the Bottom Line
Net income / Net profit Income before taxes less taxes
What does it tell us?
Net profit tells you how many dollars the company kept after paying all its costs and expenses
The relationship?
Up → good, Down → bad
Other parameters wanna know
EBITDA: Earnings before interest, depreciation, taxes, and amortization
What does it tell us?
Tell us a company’s operating profitability before:
- non-operating expenses (such as interest and “other” non-core expenses)
- non-cash charges (depreciation and amortization).
The relationship?
Up → good 👍🏻, Down → bad 👎🏻
Normalized EBITDA
Vertical Analysis
Vertical analysis
refers to the method of financial analysis
where each line item is listed as a percentage of a base figure within
the statement. This means line items on income statements are stated in
percentages of gross sales, instead of in exact amounts of money, such
as dollars.
In short, it’s the process of reading down a single column of data in a financial statement, determining how individual line items relate to
each other (e.g., showing the relative size of different expenses, as
line items may be listed as a percentage of operating expenses).
This type of analysis makes it simple to compare financial statements across periods and industries, and between companies, because you can
see relative proportions. It also helps you analyze whether performance
metrics are improving.
Vertical analysis isn’t always as immediately useful as horizontal
analysis, but it can help you determine what questions should be asked,
such as: Where did costs rise or fall? What line items are contributing most to profit margins? How are they affected over time?
Horizontal Analysis
Whereas vertical analysis focuses on each line item as a percentage of a base figure within a current period, horizontal analysis reviews and compares changes in the dollar amounts in a company’s
financial statements over multiple reporting periods. It’s frequently
used in absolute comparisons, but can be used as percentages, too.
Horizontal analysis makes financial data and reporting consistent per generally accepted accounting principles (GAAP). It improves the review of a company’s consistency over time, as well as its growth compared to competitors.
Because of this, horizontal analysis is important to investors and
analysts. By conducting a horizontal analysis, you can tell what’s been
driving an organization’s financial performance over the years and spot
trends and growth patterns, line item by line item. Ultimately,
horizontal analysis is used to identify trends over time—comparisons
from Q1 to Q2, for example—instead of revealing how individual line
items relate to others.
