Finance Fundamentals

Balancesheet

Liquidity, capital assets, credit metrics, liquidity ratios, leverage, ROA (return on assets), ROW (return on equity)

Shows a company's...

1. Assets
2. Liabilities
3. Shareholders' equity (what it owns, owes, is worth)

Income Statement

Growth rates, margins, profitability

Shows a company's...

1. Revenue
2. Expenses
3. Net Income

Cash Flow Statement

Short/long term cash flow profile, needs to raise money or return capital to shareholders

Shows a company's cash inflows/outlflows from...

1. Operation
2. Investments
3. Financing

Finance Formulas

• Revenue = Volume x Price
• Cost = Fixed Cost + Variable Cost
• Profit = Revenue - Cost
• Profitability or Profit Margin = Profit/Revenue
• ROI = Annual Profit / Principal Investment
• Breakeven or Payback Period = Principal / Annual Profit
• ROE = Profits / Shareholder Equity
• ROA = Profits / Total Assets
• WACC: Weighted Average Cost of Capital
  • Blended cost of capital across all sources (common/preferred shares, debt)
  • (% debt vs total capital) x (1-effective tax rate)+(% equity vs capital) x (required return on equity) check this

Questions

What is cheaper: debt or equity?

• Debt: backed by collateral and paid off before equity
• Debt is more liquid ?

What is the best financial statement to measure a company's health?

Cash is king. Cash Flow Statement shows how much cash company is actually generating

Arguments for other statements:

• Balance Sheet: assets are true driver of cash flow
• Income Statement: Earning power and profitability on an accural basis