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Chapter 17

What is the point of financial statements? To provide up-to-date financial information about a company to its investors and lenders, both of which are sources of capital. Employees may also be interested in the financial statements, but they must remember that these reports are written for investors in the company.

As investors, you and I want to read the quarterly and annual reports of each of our investments to determine how things are going. The information given within these reports vary from company to company, but the time you and I take to read these reports is time well spent. Reading what management has to say is important, but it is the numbers within the reports that we need to really understand.

Ok, let’s just jump to the ratios, but instead of using the numbers from the book, we will use WFM’s 10Q.

1) Cash Flow as a percentage of Net Income. Divide cash flow by net income. $590/$142= 4.15 for April 2013. What about April 2012? 517/118=4.38.

2) Cash Flow per share. Divide cash flow by outstanding shares. $590/189=$3.12 per share.

3) Current ratio, a fast test to determine short-term solvency. Divide current assets by current liabilities. $1,963/1,009=1.945. The author states that the current ratio should be 2 to 1, so WFM falls just short. This means that WFM has $1.945 in current assets for every $1 in current liabilities.

4) Acid Test. This is a more severe measure of short-term liability-paying ability. We divide cash, short-term securities and accounts receivables by current liabilities. $1,381/1009=1.37. We want this to be a 1-to-1 ratio, so WFM is doing just fine.

5)Debt to Equity Ratio. Some debt is good, but too much of a good thing can kill you. This ratio will let us know if the business is using debt wisely. Divide total liabilities by total stockholders equity. $1,549/3632=.42649. This ratio tells us that WFM is using $0.42649 in addition to each $1 in stockholders equity.

6) Times Interest Earned Ratio. Can a business earn enough to pay its debts. This is EBIT/interest expense. WFM does not have debt, so there is no interest expense to figure out this ratio.

7) Return on Sales Ratio. This ratio looks at a business making sales while controlling expenses. Divide net income by sales revenue. $142/3027=.04691 or 4.691% Return on Sales Equity.

8) ROE or return on equity. Divide net income by stockholders equity. $142/$3632=.0391 or 3.91% Return on Equity Ratio. As with all ratios we look at, it is important to compare WFM’s ROE to other grocery stores since this industry carriers low ROE compared to a clothing retailer.

10) Earnings per Share or better known as EPS. Divide net income available for common stockholders by shares outstanding. $141/186.9=$0.75 EPS.

There are other ratios to look at, but this all that the author covers. If someone wants to ask about other ratios, I would be glad to share some more ratios this week.

When I look at a 10Q or 10K to write a page post, I also look at the following:
1) Year over year revenue changes.
2)TTM revenue.
3)Net Income for the quarter or year.
4) TTM Net Income
5) Cash and debt levels.
6) Inventory, I want this tracking changes in revenue.
7) Accounts receivables tracking revenue.
8)Cash Flows...remember that this is often different than net income.

Questions?

David
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