If you are wondering how to understand financial statements this course is for you. I am going to explain all of the necessary things you will need to understand how do to analyze financial statements. If you are just taking the very first steps in understanding how to invest in stocks, learning about financial statements should be very high up on your list of things to understand. For anyone that is trying to understand the stock market for beginners, the two big first building blocks will be understanding the fundamentals of what the stock market is, what stocks are, and then learning how to analyze a company. A perspective investor would want to understand the basics of a company and what the financials of the company show.
In this section I will break down gross profits. Gross Profits are an important part of the financial statement. Gross profits encompass three main lines of the first portion of the revenue statement. Understanding gross profits is the first step in understanding how well a company has performed. This is one of the first thing an analyst will look toward when determining how well a company has performed.
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What are Continuing Costs
When you set out to determine how well a company has performed you will look within the financial statements. There are three sections of financial statements for a publicly traded company:
A company’s performance is determined by several metrics. The first is revenue and profits. This is followed by total equity which is shown in the balance sheet.
The Income Statement is broken down into smaller sections:
- Gross Profits
- Operating Profits
- Continuing Profits
These are the three sections of the income statement. But, within these three sections there are several other lines that break down how a company has performed during a period of time.
Here is the Apple financial data from the Nasdaq website for AAPL stock.Nasdaq AAPL Stock Financial Data. Above, you can see for the annual period ending in 9/25/2021, Operating Income was at $108.9B. Operating income, of course, encompasses gross revenues less any costs of goods sold and operating costs associated with running the business.
From here, this begins the last section of revenue & costs that a business may see during the period.
Additional Income & Expenses
During the normal course of business, a company generates both income and expenses. However, from time to time, a business may generate income or revenue beyond what might be considered normal for the business.
For instance, if you are a cupcake company with a storefront, selling of cupcakes, coffee, and other types of edible items would be normal to the business. And, costs associated with generating this revenue, such as flour, sugar, and other raw materials, would also be normal.
But, suppose you upgrade mixers through the course of years of being in business. The cost to acquire the business would be a normal cost. However, if you sold our old, used mixer, this would be income to the business. However, this would not be normal to the business. This type of abnormal income might show up in this section of the financial statement under additional income & expense.
Additional income and expenses are deducted from the operating profits at this point in the income statement.
Earnings before Income Taxes
The next item is the Earnings Before Income Taxes (EBIT) section. This could be an important metric if you are comparing international companies or, if you are comparing two companies within one country and want to see which company is more effective at generating after-tax income. Separating out this metric will enable an analyst to determine which company is more effective at generating after-tax income.
Just as certain as death is, so are taxes. Every company has to pay taxes. Effectively minimizing taxation liabilities is an art form. The line item for total taxation after all other expenses is shown here.
The final, bottom line item in the income statement is net income. Net income is the amount of income, on a whole basis, after all revenue is aggregated and all costs are deducted. This is the profit to all of the shareholders. This is what drives ownership of shares in a company.