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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Introduction to Fundamental Analysis Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions


Income Statement Analysis

 - Great companies and good
    EPS growth do not guarantee
    stock market profits

 - The P/E ratio can create
    buying opportunities


 - Mishaps can create steals

 - Unusual charges reduce the
    value of your stock

 - ROE is the single best tool
    for investors

 - ROA is another valuable tool

 - Investors pay for high profit
    margins

 - Lenders can eat up all the
    profits

 - Depreciation creates
    deferred taxes, which have
    equity-like qualities


 - EPS is a complicated
    calculation

 

 


Unusual charges reduce the value of your stock

Investors need to concentrate on the non-recurring, extraordinary, or unusual items in the P&L, as well as those “non-owner” items charged directly to shareholders’ equity. Any charges that reduce shareholders’ equity ultimately reduce the value of one’s investment. Cash flow that would have been available to the shareholders is being, or has been, diverted to cover such charges.  These items include asset impairment charges, losses on the disposal of discontinued operations, other-than-temporary write-down of investments, legal settlements, etc. In our current business climate, these “unusual” charges are everyday business events, and should therefore be viewed as such.

Unusual charges represent the quality of decisions made by management and they do affect the value of the company. If there is less money in the kitty, then the value of your holdings is less.

Additionally, “back door” expenses need to be factored into investment decisions. These are non-owner charges that are paid out of shareholders’ equity and bypass the income statement. By definition, shareholders’ equity is equity that belongs to the shareholders. Comprehensive income charges, however, are non-owner items that are charged directly to shareholders’ equity. The back door has been pushed open and money is escaping. Non-owners now have their hands in the pockets of shareholders.  

The net income of a company belongs to the owners; no other stakeholder should have a claim to these funds. Giving employees stock options or stock grants for “sweat equity” is one issue; allowing direct non-owner charges to equity is just wrong and should not be allowed, but it is! Essentially, the net income and cash flow that belongs to the present shareholders is being given to non-owners. That said, you as an investor must decide where that leaves you.

In summary, businesses are not solely valued on earnings/cash flow from recurring operations. Unusual non-operating expenses drain financial resources which, ultimately, negatively affect share prices.

 

 

 

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