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How to Read Company Financial Statements (Basics Explained)



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an important part of analyzing a company

for a potential investment is

understanding their past current and

potential future financial situation

unfortunately a lot of investors skip

past this part and focus just on the

products and services the company offers

and whether they feel that they have a

good future or not and we're not even

talking about Wall Street bears Yolo

type investors either we're talking

about everyday investors who take

unnecessary risks by not looking into

the financial health of the companies

they're investing in the most common

reason for this is that they don't

understand the financial statements and

that's quite understandable because

they're full of numbers strangely worded

items and can seem a bit confusing or

complicated but in reality they really

aren't so complicated at all and are

nothing to be afraid of in fact once you

know the basics it can actually be quite

interesting to dive into the financial

statements of a company and analyze how

the company's being run and any

potential opportunities or threats that

there may be there are a number of

different ways to analyze the financial

statements but before you get to that

stage you need to know how to read them

so you know what it is that you're

looking at in this video we all go

through the basics of a financial

statement and explain the key sections

so you can see how straightforward it

really is now as I'm sure you can see

from the length of this video we're not

going to go into detail about absolutely

everything but we're just going to go

through the main sections so you can get

a good understanding and in any case

most of the items once you understand

how these statements work are pretty

self-explanatory they're actually

labeled and you can figure out what it

is that they're showing you as an

example for this video we'll be looking

at the latest quarterly results from

Tesla now it's important notes that

financial statements may differ slightly

depending on the company or the industry

or the country they report in however

for us listed companies like Tesla the

financial statements would be included

in the 10k and 10-q filings which are

mandatory for all publicly traded

companies in the US by the SEC the 10k

is an annual statement and the 10-q is

quarterly the 10k will provide more

information about the company and it is

audited so the information you see in it

will be more dependable and more

accurate but let's take a look at what

Tesla provided in its most recent report

which was for the first quarter of 2020

the financial statements for company are

usually made up of three main statements

we have the balance sheet the income

statement and the cash flow statement

the balance sheet is typically the first

statement to appear and it gives a

snapshot of the company's assets

liabilities and shareholders equity at a

specific point in time these three

aspects make up what is known as the

balance sheet equation also known as the

accounting equation this stays that

asses are equal to liabilities and

equity the balance sheet is split into

five sections current assets non current

assets also known as long-term assets

current liabilities non current

liabilities

also known as long-term liabilities and

equity which is also known as

shareholders equity or shareholders

funds let's start by looking at the

assets these will be listed in order of

how liquid they are which means how

easily they can be changed or converted

into cash so current assets are assets

that are expected to be either used or

sold within the next year this will

include things such as cash cash

equivalents money owed by customers

inventory and goods and services that

have been paid for but not yet used the

non current assets are assets that are

not expected to be sold or used within

the next year Tesla includes things such

as leased vehicles and solar energy

systems but there are also more common

items also listed such as property

plants and equipment

along with Lisa's intangible in other

words non-physical assets and goodwill

the next section shows the liabilities

again we have current liabilities which

are the obligations that are due within

the next year and this includes things

like money owed to suppliers even money

that has been paid but the good or

service is yet to be delivered along

with the portion of long term debts that

has jude's be repaid this year then we

have the non current liabilities which

are obviously obligations that are not

you within the next year this includes

long-term debt and again money that's

received but the good or service has not

yet been delivered the last section is

equity which is often referred to as

shareholders equity or shareholders

funds you could think of this as being

whatever would be left over for

shareholders if all assets were

liquidated and all liabilities were paid

off

therefore if the figure is positive it

means the company has enough assets to

cover its liabilities and if it's

negative it means that it doesn't

shareholders equity will include

information about shares that were

issued any capital paid in by

shareholders paying for shares in the

company and retained earnings which is

money accumulated from the company's

earnings and kept in the company the

next financial statement is the income

statement this is also known by other

names including statement of operations

and profit and loss statement amongst

many others this statement is going to

show us that earnings and expenses of a

company over a specific period of time

this important to keep in mind the

balance sheet was a snapshot at a

particular point in time whereas the

income statement is looking at what

happens over a specific period of time

so the income statement is helping us to

see a company's financial performance

for that period companies will structure

the income statement differently but

listed companies like Tesla

we'll typically follow what we refer to

as a multi-step income statement which

separates the operation revenue and

expenses from those coming from a non

operating activity so we're looking at

gross profit operating income or loss

the income or lost before taxes and then

the income or loss after taxes to get to

the gross profit with typically look at

total revenue minus the cost of that

revenue so traditionally here you'll

have sales revenue and in the costs you

may have heard of the term cost of goods

sold so this gives us the gross profit

we can then look at operating expenses

things like research and development for

creating new products selling general

and administrative expenses which are

all the costs not directly involved in

production of a product or service but

needed of the day-to-day business

operations this will include things such

as rent salaries for executives and

other management expenses admin staff

and basically any non sales people so

ultimately we end up with our income or

loss from operations we can then look at

any interest paid or received to find

our income or lost before taxes and then

finally the income or loss after taxes

the third of the three major parts of a

financial statement is the cash flow

statement so the income statement that

we just looked at may show us the profit

or loss generated during a period but

that doesn't necessarily equal cash a

company will need cash to survive so the

cash flow statement is going to help us

by giving information about company's

liquidity and solvency solvency means

having enough funds or liquid assets to

make necessary debt payments and funds

the company's operations if the company

runs out of cash it could be insolvent

which is one of the main reasons for

businesses failing the cash flow

statement will tell us the amount of

cash or

- equivalents coming into the company or

leaving the company therefore showing us

how much cash is on hand for a company

to make is necessary payments the cash

flow statement is usually split into

three main sections cash from operations

cash from investing activities and cash

from financing activities

the first section shows us the cash flow

from the primary revenue generating

activities of a company so this includes

the company's products or services

things like cash from sales rent

payments salary payments and so on cash

flows from current assets and current

liabilities next are the cash flows from

investing activities the focus here is

on acquiring or getting rid of long term

assets this will show us outflows due to

investments made in things like property

and inflows when assets are sold however

this statement doesn't detail the

investments and so the quality of those

investments can't really be assessed and

finally we have the cash flow from

financing activities which shows us cash

coming in or going out due to any equity

capital or borrowings it tracks cash

flow between the company is owners

creditors and lenders including

stockholders so there you have it simple

wasn't it those are the main sections of

the three main statements that make up a

company's financial statements the

balance sheet the income statement and

the cash flow statement now we didn't go

into lots and lots of detail this was a

high-level overview but just by

understanding those main sections and

how the statements are laid out and how

they relate to each other in the jobs

they do you can already get a good grasp

of what's going on in the company and

you should now be able to read a

company's financial statement and

understand what you're seeing

I'd recommend downloading the financial

statements of companies from different

industries and seeing how they differ

from one another and whether you can

read them now and get a better

understanding of what's going on in

those specific companies and if you like

video and want to see more on this topic

such as how we can take this a step

further and use ratios to analyze the

financial statements then hit that

thumbs up button to let us know and if

you're looking for something to watch

next why not check out our legends of

investing video about the story of

Warren Buffett someone who reads more

financial statements than practically

anyone and as always if don't forget to

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and thanks so much for watching see you

soon