Question

Select one (1) U.S. publicly traded company and review its most recent Annual Report. (You may use one (1) of the three (3) companies you selected for your Stock Journal assignment.) Use the Income Statement and Balance Sheet to determine the changes in: assets, liabilities, and equity total revenue and net income Briefly describe the change from the current and prior years in each of these key areas and determine if the changes would be positive or negative from an investor / stockholder’s view.

Answer 1

First of all, dont be under the preconceived notion that companies do not report proper picture to the shareholders. Accounting Standards are mandatorily applicable, and that is the reason the treatment given by companies across the board is mostly similar, except for company specific circumstances, which will be clearly given in the Notes to the Financial Statements. If you are in a position to understand the notes on accounts, your worry about companies finding a way to give false view of their earnings and using manipulation will be put to rest

The annual report is a bulky document, sometimes running into 180-200 pages. Experts say one should read the full document. “Investors should go through each line of the annual report,” says Daljeet S. Kohli, Director & Head of Research, India Nivesh Securities. To begin with, focus on the first part of the report. “Most companies give financial highlights of the past 10 years.

Lets take the example of Loreal...below mentioned are the steps of analysing its latest annual report.

Experienced managers, investors, and analysts collect industry information over time that allow them to perform financial analysis of companies more thoroughly and more swiftly.

But, for our purposes we will discuss the basic steps for you to start dabbling in the art of financial analysis.

Step 1. Collect the company’s financial statements from the last three to five years including:

• Balance Sheets
• Cash Flow Statements
• Income Statements
• Shareholders equity statements

Step 2. Analyze these financial statements and scan them in order to look for large movements in specific items from one year to the next.

Lermack poses this example, “Did revenues have a big jump, or a big fall, from one particular year to the next? Did total or fixed assets grow or fall?”

Also, look for suspicious activity. If anything jumps out at you, research what you know about the business to find out why an item is suspicious-looking. For instance, did the company sell off some of its operations during the period of time you’re analyzing?

Step 3. Make sure to review the financial statement’s notes. These notes may have information that could be important in your analysis of the business.

Step 4. Analyze the Balance Sheet to see if there are large changes in the company’s assets, liabilities, or equity.

Step 5. Examine the Income Statement to identify trends over time.

Step 6. Next, evaluate the business’s Shareholder’s Equity Statement. Lermack recommends asking, “Has the company issued new shares, or bought some back? Has the retained earnings account been growing or shrinking?”

Step 7. Analyze the company’s Cash Flow Statement.

Step 8. Calculate financial ratios. Learn the top five financial ratios and how to calculate them.

Step 9. Then, gather the company’s key competitor’s data.

Step 10. Review the market data of the business’s stock price, as well as the Price to Earnings (P/E) Ratio.

Step 11. Review the Dividend Payout. The Dividend Payout Ratio measures the percentage of a company’s net income given to shareholders in the form of dividends.

How to calculate the Dividend Payout Ratio: Total Annual Dividends Per Share / Diluted Earnings Per Share

Step 12. Now, you can evaluate all of the data YOU generated. Congratulations, you did it! You successfully performed a financial analysis on a business!

Keep in mind that there are other steps you can take along with these steps to get a deeper understanding of the meaning of the company’s numbers and how they impact performance and growth.