Analyze Balance Sheet through Laser Eye - Part 01

 

Analyze Balance Sheet through Laser Eye

 

 

One of the main differences between the balance sheet and other financial statements is that it is created on a specific day. Generally, a business prepares a balance sheet at the end of each quarter and the end of each year. In studying that, we should be more concerned about reading an updated balance sheet. For example, if we are studying a business in the middle of the year, instead of looking at the balance sheet of the annual report issued last year, we should read the balance sheet of the quarterly report issued in the last quarter. It is simply like a snapshot of a business.

 

It mainly consists of three parts namely assets, liabilities, and equity. Liabilities are classified as current liabilities and non-current liabilities and assets are classified as current assets and non-current assets. Current liabilities mean the debt is to be settled in less than one year. which includes accounts payable, accrued expenses, and short-term debt. Non-current liabilities include loans that have to be settled in more than one year. Amounts payable to vendors, unpaid taxes, loans from banks, loans from bond issuance, etc. are included in this section. 

 

This article will discuss the assets side of the balance sheet that held by a business in detail.

 

The characteristics of the most successful businesses in the world are that their debt is less compared to their assets.

 

Assets = Equity + Liabilities

 

Short-term assets consist of cash and cash equivalents, short-term investments, and amounts due from other debtors. This is entered in the balance sheet according to the liquidity order of the assets. That is, by determining how quickly these can be converted into cash. In the past, these short-term assets were also known as floating assets.

 

The more cash and cash equivalent in a business, the better for the business. To take a detailed look at cash and cash equivalent, you need to study the balance sheet of the last six or seven years. The reason for that is that if the cash and cash equivalent showed a higher value in the selected year, you can accurately check whether it is the money received by your business from a one-time event. (such as the sale of new shares or bonds, or the sale of an asset of an existing business).

 

Inventory, Inventory refers to the bonds that are stored in anticipation of taking the business. Since the balance sheet of a business is made for a particular day, the inventory includes the amount of inventory that was on that day. One of the disadvantages of businesses in general is that their inventory expires over time. But in the businesses doing business in the manufacturing sector, since their products do not change with time, they can achieve a competitive durable advantage in this sector. This is because this section allows you to gauge whether the business is maintaining enough inventory with demand.

 

Total receivable, Once the business goods are sold to a buyer, they can be sold on credit or cash. The business allocates some portion of the goods sold on credit as bad debt and the reason for this is that the business allocates the expectation that they will not receive a certain portion of the goods sold. It is called bad debt and it is deducted from receivables and shows in the books of the business as net receivable. 

 

Net Receivable = Receivable - Bad debt

 

Although net receivables do not express a very precise statement about the long-term existence of the business, it shows how well the businesses in the same industry are doing their day-to-day activities. One trick that businesses do here is to give their customers 90,120 days instead of 30 days to pay for the borrowed goods. This will increase the sales of the business, but then the amount of bad debt of the business may also increase relatively.

 

 

Prepaid expenses, In some cases, a business makes payments in advance for the goods or services they are due to receive. For example, the payment of insurance premiums for the next year can be mentioned.  

 

Other current assets can be identified as the last part. It includes deferred income tax recoveries.

 

Breakdown Explanation of Income Statement

Revenue- Where the money comes from. The first line on the income statement is always the total income. This refers to the total amount received by the business during a certain period of time. It is calculated quarterly or annually.

 

Cost of Goods Sold – This includes the total cost you incurred to earn the revenue. For example, if the cost you incurred to get 100 revenue is 40, it is included here. This includes the wholesale value of goods acquired in anticipation of the resale of the business or the total amount spent on the overheads of a business that manufactures goods and the cost of employees incurred in the manufacturing process.

 

Gross Profit - This is what you get when you subtract the total cost from the total revenue. After subtracting $40 from the $100 obtained in the above example, the remaining amount is $60. The gross profit margin is 60%. An increase in the gross profit margin of any business is the most auspicious sign.

 

Operating Expense - This includes research and development cost, selling and administration cost, depression and amortization cost, restructuring and impairment charges, and non-operating, non-recurring expenses incurred during the course of the business. After adding all these expenses we get the total operating expenses of the business.

 

Operating Profits – Operating expense, which is the sum of all the expenses mentioned above, is deducted from gross profit. Then the business will own the amount of operating profit obtained at the end of a certain period.

 

Interest Expenses – This includes the interest paid on the loan taken in relation to a quarter or year of business. As you already know, this aspect is always seen in the income statement of a business because it is necessary to get capital or loan money to expand a business. The more debt the business has, the more interest the business will have to pay. The less debt a business has, the less likely it is to go bankrupt.

 

Gain and Losses Assets - The business includes the amount received from the sale of an asset it owns (other than inventory). If we analyze this further, if a building acquired for $1,000,000 is estimated at $500,000 at the end of depreciation, but if it can be sold for $800,000, the additional $300,000 is stated as the profit from the sale of business assets. Similarly, if an asset estimated at $200,000 was sold at the end of depreciation for $100,000, the remaining ($100,000) is stated as a loss on the sale of the business's assets.

 

Income Before Taxes - You can see the income before taxes section in an income statement after making adjustments to the interest expenses and the profit and loss from the sale of handicrafts to the operating profit received above.

 

Income Taxes Paid - The interest payable on the profits earned by the business may or may not vary depending on the country in which the business is conducted, and the field of business in which the business is engaged. For example, generally speaking, a government charges a higher tax from a business engaged in the alcohol & tobacco sector, while a business producing consumer goods charges a comparatively lower amount of tax. But this is not always the case. Therefore, it is more appropriate to have an understanding of the corporate tax rate of the businesses you are going to invest in.

 

Net Earnings - At the end of the income statement, we can see the gross profit earned by the business at the end of a certain period. The board of directors decides how much of this gross profit is distributed to the shareholders of the business and how much is reinvested by the business. As an investor, you have to study the income statement completely to get a good understanding of the costs incurred by the business to get this gross profit. 

I hope these brief explanations of mine have helped you to do your analysis more successfully.

 

 

 

Things to Know About Company Operation

 Things to know about company operation

1.      What are LLCs (limited liability companies)?

 

Companies are governed by a board of directors appointed by shareholders. Unlike a sole partnership, these businesses have a separate existence separate from the owner by law. Therefore, the assets and liabilities of the business are limited to the business itself.

 

 

2.      Explain the concept of “limited liability” 

 

This means that the business is limited in liability. It further explains that the business is referred to as a separate person from the business owner. Because of this, the debts of the business are limited to the business itself and in the event of a business bankruptcy, the business owners are not obliged to pay it from their assets.

 

 

3.      What is the working capital of a business?

Working capital refers to the basic amount required to run a business. This is identified by subtracting current assets from current liabilities. Negative working capital for a business means that they do not have enough money to cover the day-to-day expenses of the business. Another name for working capital is a net current asset. A working capital cycle is a process from receiving goods from suppliers (accounts payable) to selling to customers (account receivable). Payments to suppliers are made here from the money received from customers.

 

 

4.      What are public limited companies?

 

A public limited company is a company registered in a stock exchange. As you know, a small amount of capital is enough to start a business. But as the business expands, they need more capital. As a solution to this, private limited companies are registered in the stock market and issue shares to the public. After this, the business is called a public limited company. One of the main features is that the company is obliged to inform the shareholders of its business about some of the financial affairs and internal transactions that have not been disclosed so far. Business financial information is issued separately in 10k and 10q. (10K releases an audited financial statement calculated annually. 10Q reports release unaudited financial statements quarterly three times a year. Also, corporate disclosure discloses the internal transactions of the business to the public.

 

 

5.      What is a dividend that public limited companies issue?

 

A dividend refers to the distribution of a portion of the profit earned by the business to the shareholders of the business. This is decided by the board of directors of the business. The percentage determines how much of the profit earned by the business is invested in future growth and what part is given to the shareholders. Matured companies usually give dividends up to 60% of their profits. Young growth companies (companies that grows revenue growth at around 20-25% a year) often don't pay dividends. Dividends cannot be expected from such companies. This is because the main objective of the business is to expand the business in its infancy. When you consider it as a company, the thing that must be remembered is that the dividend should be given only if the shareholders are entitled to a similar benefit rather than a replacement of that amount. Also, as an investor, you should pay attention to the fact that the business should give dividends only from profits. Not by selling their assets.

 

( 2 ) Strategies of Peter Lynch – Author of One Up On Wall Street

 

Strategies of Peter Lynch – Author of One Up On Wall Street

Part 02

Key takeaway 03: Stalwarts

Stalwarts are the companies that are in the middle of fast growers and slow growers. Peter lynch mentioned that they are recession-proof companies.

The fourth category of companies is cyclical. Cyclical companies that use profits move up and down in cycles. It could be companies in the cement or oil industry as oil raw materials (Clinker and Oil price) generally move up and down according to the supply and demand of the time. Automobile companies are another example of cyclical companies. When the economy is strong and demand for a new vehicle is high these companies can be very profitable. However that can flip very quickly, the economy can slow down new vehicle demand can reduce rapidly and all of sudden these companies lose a lot of money. In cyclical companies trick is to buy them during the downside and exit during the upcycle.

 5th category is turnarounds. Turnarounds are companies that are currently struggling but you think will turn themselves around. Wells Fargo is a current example of this category. For turnaround companies, the strength of the balance sheet is very important because they need to survive in tough times if there is any possibility of a turnaround. (Make sure to stay away from companies that have high levels of debt because they are the companies that can go bankrupt. Keep your eye on Debt: Equity ratio & Current ratio.

6th category is asset plays.  This is all about the assets of the company that is underappreciated by the market. The assets can be tangible or intangible. (ex: for tangible assets – Building, Vehicle, Factories | ex: for intangible assets – Goodwill, license, patents)

Key Takeaway 04: Don’t over-diversify your portfolio

Many investors have 25 to 30 stocks in their portfolios and know little about these companies. But they believe they need to have more companies in their portfolio to be diversified. Peter lynch refers to this as “diworsification”. This is where people buy companies that are not good and that they know less about just for the sake of portfolio diversification.

Key takeaway 05: Look for ten baggers

One of the key reasons peter lynch outperformed the market in his 13 years of a fund carrier was the fact that he was able to identify stocks with huge growth potential. Peter lynch called this type of company ten baggers. Meaning that the stock price has the potential to be 10X from its current price. It’s easier to find ten baggers when you are looking at smaller companies than when you are looking at larger companies. On average it’s much easier for a stock to go from a market cap of 1 billion dollars to 10 billion dollars than a company to go market cap from 1 trillion dollars to 10 trillion dollars. Large companies may great investments but they won’t be ten baggers due to the difficulty of growing if you are already a large company.

 

Strategies of Peter Lynch – Author of One Up On Wall Street

Peter Lynch was the manager of the Magellan fund at Fidelity Investment. As the manager of the Magellan fund between 1977 to 1990 lynch averaged 29.2% annual return. More than double S&P 500 index and making it the best-performing mutual fund in the world. His book, one up on Wall Street is must read for anyone who loves to invest in the stock market.

Key Takeaway 01:

A stock represents part ownership of a business. It's not just pieces of paper that float around in price. one of the keys to successful investing focuses on the companies. Not on the stocks. Don’t worry about the short-term price movement of the stock. You have to accept the short-term price volatility of a stock to get benefits in the long term. Instead of a focus on the short-term price changes of stock, try to focus on the underline performance of the business because in the long run stock price follows the earnings of a company

If you invest in Walmart focus on how much percentage they grow their revenue over the past ten years. And their gross profit margin, net profit margin, earning per share, dividend per share, the net asset value of a share, return on equity, return in invested capital, cash flow per share, growth or decline of market share of a particular industry, and whether they have honest and skillful management to operate the business. To understand the company you need to research the company.

 

Key Takeaway 02:

Types of companies. Number one fast growers. These types of companies have proven to be growing their earnings per share by about 25% or more. The key to investing in these types of companies varies and exits when the revenue growth rate slows down. Fast growers are not usually owned by big money institutions and they are rarely heard of. Because of that, these kinds of companies are underappreciated and maybe sell at discount. 

Number two: Slow growers. Slow growers are companies that pay a dividend. The best kind of dividend-paying companies is those that grow their dividends consistently every year. With these kinds of companies, we should look at their dividend payout ratio and dividend growth rate. The dividend payout ratio is how much they pay as dividends from their profits.

More than 100% is a warning signal because dividend needs to be paid from profits that they make. Companies manipulate dividend payments by selling their assets to attract and steal retail investors' money. Stay away from those companies when you find one. You can identify General motors as slow growth company because they do not have any more market share to catch. Now they are in a matured stage in their industry and they maybe distribute 50% or 60% of their profits to shareholders as dividend payments of share buybacks. 

As you already know, to maximize profits, a business has to either increase revenue or minimize expenses. A business in the matured stage often tries to reduce costs. But as there is a limit to that, after this time the profits of the business may start to decrease. Then you can observe that the amount of dividend entitled to the shareholders is gradually decreasing.

 

Stay tuned for the next chapter of this article..

 

Story of SPAC King

 

Chamath Palihapitiya

Chamath palihapitiya is Sri Lankan born American Canadian billionaire. He’s such a great

example of his entrepreneurial skills and innovative ideas that change the world of finance and

investing. He almost becomes one of those one-name people who listen in finance circles.

After he complete his early Facebook executive journey in 2011, Chamath made a name

for himself and also started making angel investments on the side with his money.

Chamath is the founder and CEO of social capital, which provides funds and technology for

startups. Chamath founded Social Capital in 2011 to invest in companies in fields being ignored

by other venture capitalists, like the health sector, financial services, and education. However, the

firm has since expanded to invest in tech companies like Amazon, Tesla, and Slack. We can

identify some great entrepreneurial skills such as risk-taking and not being afraid of trying new

things from his character.

 

Thanks to the investment skills he managed to build billion dollar empire at age of 32. He

highlights that the best way to become successful in business is own equity percentage. At

an early stage, he accepted minority share ownership of the company instead of a paycheck.

In 2011, he left Facebook and started his fund, the social capital partnership with his wife,

the firm changed its name to social capital in 2015. Through the fund Palihapitiya invested

a number of companies including Secondmarket, Slack, and yammer. As of 2015, the fund had more

than 1.1 Billion $ in total assets under management, and most of them came from other

investors who believed in Palihapitiya's vision.

 

Innovation and invention

 

In 2018, Social Capital became mainly a permanent capital model and launched two SPAC

platforms.SPACs are used for special-purpose acquisition companies.

These platforms were created, according to Social Capital's website to "provide an alternative

the growth path for companies to go public while continuing to make public and private

investments, with a broad focus across climate science, life sciences, crypto/decentralized

finance, and deep tech.

 

In 2019, he sponsored a company that merged with Virgin Galatic. (Company of Sir Richard

Branson) later selling a large part of his stake for $200 million in March 2021. He continues to

sponsor Special-Purpose Acquisition Companies IPOs.

 

Chamath Palihapitiya raised six special purpose acquisition companies (SPAC) in 2020,

including one with Virgin Galactic founder and billionaire businessman Richard Branson. He

also invested in two companies going public via black-check vehicles in January: innovative

lock maker Latch and solar lender Sunlight Financial.

 

SPAC

Palihapitiya known as king of SPAC. This is the one form of way that he introduces special

purpose acquisition companies to the general public and make the public aware of this.

SPACs are commonly formed by investors or sponsors with expertise in a particular industry or

business sector and pursue deals in that arena. SPAC founders may have an acquisition target

in mind, but don't identify that target to avoid disclosures during the IPO process.

Called "blank check companies," SPACs provide IPO investors with little information prior to

investing. SPACs seek underwriters and institutional investors before offering shares to the

public. During a 2020-2021 boom period for SPACs, they attracted prominent names such as

Goldman Sachs, Credit Suisse, and Deutsche Bank, in addition to retired or semi-retired senior

executives.

 

The funds SPACs raise in an IPO are placed in an interest-bearing trust account that cannot be

disbursed except to complete an acquisition or it will return the funds to investors if the SPAC

is ultimately liquidated.

 

Chamath is confident in adapting new ideas. He will be able to uncover investment ideas that

traditional asset managers won’t be able to find in fact he claims that he would rather have 500

billion dollars managed by 500 people than a small group of fund managers. This investment

philosophy is a bit different from the current context.

However, in this way, he added a tremendous diversification approach to his fund because the

people who manage Chamath’s money will be investing in a variety of companies with varying

attitudes. His ultimate goal is to build the world’s best-performing Investment Company for next

50 years. 

The exposed lesson of Steve job’s 

What is the most valuable lesson that Steve Jobs got in his life when he was working at Apple?

According to him, it is taking a longer-term view of people. By that, he means that when he sees something wrong, something inaccurate, his first reaction is not to fix it but to let it happen and look outside and try to get some understanding of its effects on the business in the long run. He believes that if he corrects a mistake as soon as he sees it, he will be able to come up with a successful answer in the short term, but in the long run, the imagination of the employees will be weakened, which will have a negative effect on the business. He further says that Apple's goal is not to produce the best innovations for the next year but to bequeath great innovations for the next few decades.

He says that one of the most valuable lessons in his life is being able to find his passion in life at an early age. Starting Apple with a friend at the age of 20, he was able to turn Apple into a $2 billion company with 4,000 employees by the time he was 30. Also, when he turned 30, the board of directors arranged to fire him from his own company. At that time, In that time he was suffering from a significant mental breakdown and decided to give up everything. But after thinking for a long time, he realized one thing and that is that he loved what he did. The result is that he returns to doing what he loved. He started two more companies and get back into Apple. The most valuable example we can get is that no matter what obstacles we face in life, we should stand up again and be courageous and determined to do what we want. He says getting fired from Apple was one of the most valuable things he ever got in his life.

Our lives have been governed by various limitations since we were born. First 18 20 years of life study well go to school then go for higher education after that apply for a job in a company are things that our environment inculcates in our heads from childhood. Apart from that, our society has put it in our heads that it is very wise to collect some money after some time and put down all the funds to buy a car or a house. But what you should think about is what kind of success and mental freedom you will get by doing these things. Most of the time all you will inherit is a pile of liabilities and a pile of bank loans. Most people have to work a job they don't like for the rest of their lives to pay off that debt. At the end of the day, all they do is shape their lives according to the limitations of the people in society. It is not a successful method. When it comes to life advice, only seek advice from people who have already achieved the dreams you want to achieve in life. For example, starting a business, creating an investment portfolio at a young age, and creating several successful passive income streams are more valuable than a vehicle or a house. Doing these things that society doesn't tell you will benefit you and your loved ones more than doing what tells you to do. This is the message steve jobs has given to the world in his interviews.