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Hi Collective,

Quite appropriate for the boards 4th birthday - Mike pkrfan asked me to post these links to some great old Fool articles on reading financial statements. They have been posted here and on many an old Fool seminar board, but for those that are newer here the old links are probably difficult to find.

For non-accountants I would recommend John A. Tracy's "How to Read a Financial Report" as it is quite understandable (and not too expensive!). Somewhere on this board is a synopsis of Tracy's book, chapter by chapter as it was worked through as a learning exercise.

For those with long memories you will note that it includes the old RuleMaker guidelines updated to include some valuation!

Understanding financials (Drip Portfolio series of articles)

I - Drippin' Groovy "Back to Basics" (Intro to SEC Forms)
II - Back to Basics
III - The Balance Sheet
IV - Noncurrent Assets
V - Current Liabilities Explained
VI - Understanding Noncurrent Liabilities
VII - Finishing the Balance Sheet
VIII - Fun With Numbers
IX - Balance Sheet Finale
X - Introducing the Income Statement
XI - Income Statement Demystified
XII - The Cost of Doing Business (COGS)
XIII - Income Statement Odds & Ends
XIV - Today's Buzzword : EPS
Statement of Cash Flows
The Value of Cash Flow
Cash Flow Efficiency


"Current Assets on the Balance Sheet" By Phil Weiss (TMF Grape)

"What Is Free Cash Flow?" By Bill Mann (TMF Otter)

"The Many Faces of Debt" By Phil Weiss (TMF Grape)

Some calculations

Use Income Statement for:

Sales Growth
Sales Growth % = {(Current Sales - Year-ago Sales)/ Year-ago Sales}*100
RM criteria not less than 10%

Gross Margin
Gross Margin % = {(Sales - Cost of Goods Sold)/Sales}*100

Net Profit Margin
Net Profit Margin % = (Net Income/Sales)*100
RM criteria not less than 7%

Use Balance Sheet for:

Cash-To-Debt Ratio
Cash-to-Debt Ratio = Cash/(Long Term Debt + Short Term Debt)
RM criteria Cash no less than 1.5x total debt

The Foolish Flow Ratio
Foolish Flow Ratio = (Current Assets - Cash)/(Current Liabilities - Short Term Debt)
RM criteria Foolish Flow Ratio below 1.25

Use Cash Flow Statement for:

Cash King Margin
Cash King Margin = (Operating Cash Flow – Capital Expenditures)/Sales
Cash King Margin = Free Cash Flow/Sales
RM criteria Cash King Margin of at least 10%

RuleMaker Criteria


Capital Expenditures includes:
Acquisition of Property and Equipment
Capital Expenditures
Capitalized Software Costs

Cash includes:
Cash equivalents
Marketable securities
Short-term marketable securities
Investment securities
Other securities
Short-term investments
Trading assets

Cost of Goods Sold includes:
Cost of Product
Cost of Services

Current Assets include:
Accounts receivable
Trade accounts receivable
Accounts receivable -- related parties
Other receivables
Loan receivable
Inventories (includes raw materials, work-in-process, semi-finished goods, and finished goods)
Deferred tax
Prepaid income tax
Prepaid assets
Other prepaid expenses and receivables
Other current assets

Current Liabilities include:
Accounts payable
Income taxes
Current portion of long-term debt
Accrued liabilities (expenses)
Deferred/unearned revenue
"Other current liabilities"

Long-Term Debt includes:
Notes/Loans payable
Bank line of credit
Capital lease obligation
Preferred stock
Convertible notes

Operating Cash Flow includes:
Net cash provided by (used in) Operating Activities

Short-Term Debt includes:
Short-term debt
Short-term borrowings
Current portion of long-term debt
Debt maturing within one year

These should keep you busy for a little while, save them and refer back to them when trying to understand financial statements.

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