Annual Report
A report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management’s analysis of the firm’s past operations and future prospects
- Verbal section describes firm’s operating results during the past year
- Other section provides the financial statements
Balance Sheet
A snapshot at one point in time of what the firm owns (assets) and owes (liabilities + equity)
Accounting Equation
Total Assets = Total liabilities + Stockholders’ Equity
Income Statement
Shows revenues and expenses over a period of time to determine net income (profit)
Statement of Cash Flows
Shows how much cash the firm began the year with, how much cash it ended up with, and what it did to increase/decrease cash
Statement of Stockholders’ Equity
Shows the changes in equity over time
Includes:
- net income added
- dividends paid out
- retained earnings accumulated
Net Working Capital (NWC)
The difference between a company’s current assets and current liabilities
Current Assets - Current liabilities
- Measures short-term liquidity
Net Operating Working Capital (NOWC)
Measures the short-term funds needed to run day-to-day operations
(Current Assets - Excess Cash) - (Current liabilities - Notes Payable)
Depreciation
The allocation of the cost of a physical asset (equipment, buildings) over its useful life
Amortization
The write-down of intangible assets (patents, copyrights, goodwill) over time
Book Value
Value of assets on accounting records
Market Value
What assets are actually worth in the market
Operating Income (EBIT)
Profit a company makes from its core business operations, before interest and taxes
EBIT = Revenue - Operating Costs
Net Operating Profit After Taxes (NOPAT)
Company’s operating profit after subtracting taxes
NOPAT = EBIT × (1 – Tax Rate)
Free Cash Flow
The amount of cash that could be withdrawn from a firm without harming its
ability to operate and to produce future cash flows
Positive FCF → firm generates excess cash
Negative FCF → firm reinvesting heavily (not always bad)
Free Cash Flow Formula
FCF = EBIT × (1 − Tax Rate) + Depreciation − Capital Expenditures − ΔNWC
Net Income
Total profit after all expenses and taxes
Dividends
Portion of earnings paid to shareholders
Retained Earnings
Earnings kept in the business to be reinvested
Market Value Added (MVA)
Measures how much value the firm has created for shareholders
If MVA is positive → firm created wealth
MVA Equation
MVA = Market Value of Equity − Book Value of Equity
Economic Value Added (EVA)
Measures true economic profit
If EVA > 0 → firm is creating value
If EVA < 0 → firm is destroying value
EVA Equation
EVA = NOPAT−(Capital×Cost of Capital)
Corporate Taxes - Key rules:
- Interest is paid out of pre-tax income
- Dividends are paid out of after-tax income (Net income)
- Can write off interest, roll tax losses forward
