Financial Statements 101: A Question-and-Answer Guide

Comprehensive Income: This represents all types of income that a company earns, including both operating and non-operating income. It includes revenue from normal business operations as well as income from investments, interest, dividends, and other sources.

Operating Revenue: This is the income generated from the company's primary business activities, typically through sales of goods or services. It excludes income from non-core activities, investments, or exceptional items.

Net Income (Net Profit/Loss): The total profit or loss after deducting all operating expenses, interest, taxes, and other non-operating charges from total revenues. Net income is a key figure used to assess the financial health of a company on a quarterly or annual basis.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): A measure of a company's total earnings before deducting the costs of interest, taxes, depreciation, and amortization. EBITDA is used as an indicator of a company's overall financial performance and its ability to generate positive cash flows.

Net Profit Margin: This ratio shows the percentage of revenue remaining after all expenses, including taxes, interest, depreciation, and amortization have been deducted from total revenues. It indicates how much profit a company makes for every dollar of sales.

EBIT (Earnings Before Interest and Taxes): The earnings of a company before the deduction of interest and taxes. This figure is often used to compare the profitability of companies in different tax regimes or those with differing levels of debt.

Interest Expense: The cost associated with borrowed funds. It's an important item for understanding how much a company spends on servicing its debt and is typically found within the income statement under "Selling, General and Administrative Expenses."

Tax Expense (Provision for Taxes): The amount of money set aside by a company to pay income taxes as required by law. It's based on pre-tax income and applicable tax rates. The actual cash paid in taxes may differ due to various deductions and credits.

Depreciation Expense: The systematic allocation of the cost of tangible assets over their useful lives. It reflects the wear and tear, deterioration, or obsolescence of the asset.

Amortization Expense: Similar to depreciation but applies to intangible assets such as patents, copyrights, and trademarks. It's the process of allocating the cost less any salvage value of an intangible asset over its useful life.

Research and Development (R&D) Expenses: The costs incurred in the search for new products, services, or processes. R&D expenses are typically high in industries such as pharmaceuticals, technology, and manufacturing.

Selling, General & Administrative (SG&A) Expenses: These include all of a company's costs that are not directly related to the production of its goods or services, such as marketing, distribution, administration, and the board of directors' salaries.

Cost of Goods Sold (COGS): The direct costs attributed to the production of the goods sold by a company. It includes the cost of the basic materials and labor directly used to create the product.

Gross Margin: The difference between the revenue a company makes from sales and the cost of producing the goods or services. It's calculated as revenue minus the cost of goods sold (COGS).

Operating Expenses: These are the costs associated with the day-to-day operations of a company, excluding interest expenses and taxes.

Other Operating Income/Expense: This includes various sources of income or categories of expenses that are part of normal business operations but are not regularly occurring items.

Capital Expenditures: The money spent by a company on physical assets such as property, buildings, equipment, and vehicles. These expenditures are recorded as either investments or operating expenses on the income statement.

Operating Cash Flow: This is the net amount of cash generated by a company’s normal business operations. It's the cash that comes IN to a business from its business activities, before any investments are made.

Working Capital (WWC): The difference between current assets and current liabilities. A positive working capital indicates that a company has enough liquidity to manage its short-term obligations and invest in long-term projects or opportunities.

Current Ratio: This is a measure of a company's ability to pay short-term debt with its existing current assets. It is calculated by dividing the company's current assets by its current liabilities.

Quick Ratio (Acid-Test Ratio): A stricter measure than the current ratio, as it excludes inventory from the current assets calculation. This ratio provides a more conservative view of liquidity.

Debt to Equity (D/E) Ratio: This ratio measures the proportion of a company's assets that are financed by creditors versus owners (shareholders). A high D/E ratio could signal that a company is overly leveraged.

Return on Assets (ROA): This ratio shows how efficiently a company can generate profits from its assets. ROA is typically expressed as a percentage.

Return on Equity (ROE): This ratio measures the profitability of a company's operations relative to shareholders' equity. ROE is considered an indication of financial leverage by a company.

Return on Invested Capital (ROIC): This ratio measures how effectively a company can generate profits from its invested capital. It shows how much return investors are getting for the money they have contributed.

Inventory Turnover Ratio: This ratio measures how many times a company's inventory is sold and replaced over a period. A higher ratio indicates more efficient management of inventories, which can be beneficial in terms of cash flow.

Capital Expenditure to Depreciation Ratio: This ratio helps investors understand the relationship between a company's capital expenditures and the depreciation of its assets over time.

Operating Margin: This profitability ratio indicates how much profit a company makes on each dollar of sales. It's calculated by taking the operating income and dividing it by the net sales.

Free Cash Flow (FCFF): The amount of cash a company has available after accounting for capital expenditures, working capital, and debt payments. FCF is often seen as a surplus cash that a company can return to shareholders, invest in new business opportunities, or allocate to other corporate purposes.

Enterprise Value (EV): This represents the market value of all of a company's common equity, preferred equity, subordinated debt, and senior debt, as applied in investment banking. It is often used to compare companies with different capital structures.

Price to Earnings (P/E) Ratio: This ratio compares a company's current share price to its per-share earnings (net income). The P/E ratio is a commonly used indicator of a company's trading in the stock market relative to its earning power.

Debt to EBITDA Ratio (D/EBITDA): This ratio helps investors understand how much a company is leveraged through debt as compared to its earnings before interest, taxes, depreciation, and amortization.

Current Ratio Excluding Inventory: This ratio provides insight into a company's short-term financial health by excluding inventory from the current assets calculation.

Capital Structure (Debt to Equity): This ratio reflects the proportion of a company's total funding that comes from debt and other forms of financing versus that which comes from equity.

Cash Flow from Operations: This figure represents the net cash inflow or outflow of a company's operations after accounting for capital expenditures, working capital, and debt payments. It shows the actual amount of cash generated by its core business operations.

Total Shareholder Equity: This figure represents the total value of all the common and preferred shares of a company that are outstanding in the stock market.

Market Capitalization: This figure represents the total value of all the outstanding shares of a company's common stock that are actively traded in the stock market. It is often used as a denominator for calculating various ratios, including the P/E ratio.

Weighted Average Cost of Capital (WACC): This is an estimate of the average after-tax cost of capital that was actually incurred by a company over time, based on the historical weighted average costs of debt and equity that the company has used for its past financing activities.

Residual Income (RI): This figure represents the amount of net income that remains after all capital expenditures have been accounted for within a company's operations. It is what's left over after all depreciation, interest expenses, and capital expenditures have been subtracted from the company's total operating profits (net operating income).

Operating Margin Excluding Non-Cash Expenses: This ratio helps investors understand how much profit a company makes on each dollar of sales, excluding any non-cash expenses like depreciation, interest, or rent, from its core business operations.

Gross Margin (GM): This profitability ratio indicates how much gross profit (revenue minus COGS) a company makes on each dollar of sales. It's calculated by taking the gross profit and dividing it by the net sales.

Price to Book Value (P/BV) Ratio: This ratio compares a company's current share price to its reported book value or net asset value on its balance sheet.

Net Operating Profit Margin (NOPM): This profitability ratio indicates how much net operating profit (operating income minus operating expenses) a company makes on each dollar of sales. It's calculated by taking the net operating profit and dividing it by the net sales.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): This figure represents a company's earnings before it accounts for the costs of interest expense, income tax expense, depreciation expense, and amortization expense in its profitability calculations.

Free Cash Flow to Equity Value (FCFF to EV) Ratio: This ratio helps investors understand the potential or actual relationship between a company's free cash flow and the market value of its equity.

Capital Expenditure to Depreciation Expense Ratio: This ratio helps investors understand the relationship between a company's capital expenditures and the expense of depreciation over time.

Asset Turnover Ratio: This ratio measures how effectively a company can generate profits from its assets over a period.

Residual Operating Cash Flow (ROCFO): This figure represents the actual amount of cash that remains after accounting for all operating expenses and capital expenditures within a company's operations.

Capital Expenditure to Total Assets Value (CAPX to TA) Ratio: This ratio helps investors understand the relationship between a company's capital expenditures and the total value of its assets over time.

Residual Operating Cash Flow Excluding Capital Expenditures (ROCFE): This ratio provides insight into a company's short-term financial health by excluding capital expenditures from the operating cash flow calculation.

Market-Adjusted Price to Earnings (MA-P/E) Ratio: This ratio compares a company's current share price to its adjusted per-share earnings (net income after making adjustments for non-recurring and unusual items).

Residual Operating Cash Flow Excluding Non-Operating Income and Expenses (ROCFEE): This ratio provides insight into a company's short-term financial health by excluding non-operating income and expenses from the operating cash flow calculation. These are just some of the key ratios and metrics that investors use to analyze a company's financial health, profitability, capital structure, operational efficiency, and liquidity. Depending on your specific investment goals and risk tolerance, you may prioritize different financial metrics over others. Some metrics, like earnings per share (EPS), are more indicative of a company's immediate profitability potential, while others, like the Price to Earnings (P/E) ratio, provide a more comprehensive view of a company's overall value creation and capital return potential. Remember that while these metrics can be very insightful, they are not without their limitations. Each metric has its own context and assumptions baked into it. Always consider the full picture before making any investment decisions.