Welcome to....







Order Currently Published Books by the Author

Educational Library
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


Introduction to Fundamental Analysis

 - The Accounting Process
 - Postulates and Principles
    of Accounting
    * Postulates of Accounting
     * Principles of Accounting

 -
The Financial Statements
   * The Balance Sheet
   
* The Income Statement
    * The Cash Flow Statement
    *  Shareholders' Equity Statement

 

 


The Balance Sheet

The balance sheet reflects the financial position of a company, as of a particular date.  It shows, in detail, the assets (resources) of an organization and the claims on those assets. The claims are normally creditors and shareholders. The difference between what a company owns and what a company owes is its net worth. A classified balance sheet is more analytical. It groups accounts with similar economic characteristics, usually, by their short-term or long-term nature. Short-term assets should be funded by short-term liabilities; while, long-term assets are preferably funded by long-term debt or equity.  Categories are listed in liquidity order. Liquidity is the length of time it takes to convert an asset into cash.  The purpose of a classified balance sheet is to pinpoint asset/liability mismatches. Over all, the balance sheet gives investors a wealth of information on the financial health of a company, as of a particular date.

The main categories on the balance sheet are: cash, marketable securities, accounts receivable, notes receivable, inventory, fixed assets, accounts payable, accrued expenses, loans payable, common stock, and retained earnings. While the categories appear to be straight forward and clear-cut, the supporting details and values used can be extremely complicated, and are highly regulated by accounting, legal, and various government bodies.
 

Balance Sheet Values

The values reported on the balance sheet are normally determined by adjusting historical cost figures downward to approximate fair value, where practical. Technically, most of the values on the balance sheet are based on methodologies such as cost, lower of cost or market, net realizable value, cost less a depreciation or amortization method, discounted cash flows or fair market value. Balance sheet values normally are not written up to market value. This results in a statement that conservatively presents the position of a company, but it’s also rather complicated.  

For example, one would think that valuing marketable securities on the balance sheet is a simple process; just take the number of shares owned and multiple them by their market price, to calculate market value; charging the P&L for price swings. In fact, however, there are three different methods to value marketable securities, based on management’s intent.

They are:

1.      Held-to-maturity securities – These are usually debt instruments that are valued at historical cost and adjusted for interest.
 

2.      Trading securities – These are securities that are frequently bought and sold. They are valued at their fair market price with both realized and unrealized gains and losses being recorded in the P&L.

3.      Available-for-sale securities – These are securities that management intends to sale. They are valued at their market value. Realized gains or losses are charged to the P&L, while unrealized gains or losses are charged directly to shareholders’ equity.

The investor’s dilemma is that most of the accounts on the balance sheet have similar multiple choice options. Reading the plain categories of a balance sheet is just not sufficient in today’s environment. This is why knowing the rules is important.

Regarding stock prices, a company’s market value is normally different than its accounting value. Basically, customer relationships and products add value; as such, businesses are usually valued higher then a company’s accounting book value.

Investors would love to have updated minute by minute fair market value financial statements, similar to how stock portfolios are tracked. However, intricacies and estimates used in preparing financial statements make it neither practical nor cost efficient to have such statements prepared at this point in time. Accountants have a hard enough time accurately reporting within 45 days of the end of each quarter and 75 days of year-end. Even if the raw data to produce financial statements is available, the accounting, audit, legal, and management sign-off process takes time. Now it’s time to dig into the numbers and statistics. It’s going to take 6 sections to get a grasp of fundamental analysis.

Medtronic, Inc. (“MDT”) is being used as our example.

MDT - Consolidated Balance Sheet   
($ in millions, except per share data)

April 29,
2005

April 30,
2004

Assets

 

 

Current assets:

 

 

     Cash

$ 2,232.2

$ 1,593.7

     Short-term investments

1,159.4

333.8

     Accounts receivable, net

2,292.7

1,994.3

     Inventories

981.4

877.7

     Deferred tax assets

385.6

197.4

     Prepaid expenses

370.2

315.8

          Total current assets

7,421.5

5,312.7

 

 

 

Property, plant and equipment

1,859.3

1,708.3

Goodwill

4,281.2

4,236.9

Other intangible assets, net

1,018.0

999.3

Long-term investments

1,565.7

1,456.3

Other assets

471.7

397.3

          Total assets

$ 16,617.4
========

$ 14,110.8
========

Liabilities and Shareholders’ Equity

 

 

Current liabilities:

 

 

     Short-term borrowings

$ 478.6

$ 2,358.2

     Accounts payable

371.8

346.2

     Accrued compensation

542.2

459.8

     Accrued income taxes

923.3

637.6

     Other accrued expenses

1,064.1

438.8

          Total current liabilities

3,380.0

4,240.6

 

 

 

Long-term debt

1,973.2

1.1

Deferred tax liabilities, net

478.1

408.2

Long-term accrued compensation

157.9

123.7

Other long-term liabilities

178.7

260.2

          Total Liabilities

6,167.9

5,033.8

 

 

 

Shareholders’ equity:

 

 

     Common stock

121.0

120.9

     Retained earnings

10,178.5

8,890.9

     Non-owner changes in equity

150.0

65.2

          Total shareholders’ equity

10,449.5

9,077.0

          Total liabilities and S/E

$ 16,617.4
========

$ 14,110.8
========

 

 

Medtronic, Inc.            
Balance Sheet Statistics

April 29,
2005

April 30,
2004

Book Value – per share:

 

 

Total Assets

$ 16,617.4

$ 14,110.8

Less: Total liabilities

6,167.9

   5,033.8

Equals: Book value

10,449.5

9,077.0

 

 

 

Average Common shares O/S         

1,220.8

1,225.9

Book value per share

$ 8.56

$ 7.40

 

 

 

Tangible Net Worth – per share:

 

 

Book value

$ 10,449.5

$ 9,077.0

Less: Prepaid expenses

370.2

315.8

Less: Goodwill

4,281.2

4,236.9

Less: Other intangible assets, net

1,018.0

999.3

Tangible net worth

4,780.1

3,525.0

 

 

 

Average common shares outstanding

1,220.8

1,225.9

Tangible net worth – per share

$ 3.92

$ 2.88

 

 

 

Air – per share:

 

 

Tangible net worth – per share

$ 3.92

$ 2.88

Year-end price – per share

52.70

50.46

Air – per share

$ 48.78

$ 47.58

 

 

 

Working Capital:

 

 

Current assets

7,421.5

5,312.7

Less: Current liabilities

3,380.0

4,240.6

Equals: Working capital

4,041.5

1,072.1

 

 

 

Current Ratio:

2.20 to 1

1.25 to 1

 

 

 

Debt to Equity:

 

 

Total liabilities

6,167.9

5,033.8

Total stockholders’ equity

10,449.5

9,077.0

Debt to equity

59 %

55 %

 

Next review The Income Statement

 

 

 

 

Need a Financial Advisor ? Business & Franchising Opportunities Featured
Companies
Financial
Institutions
Other
Opportunities
Made It ?
Spend It !
Risks, Uncertainties and Disclosures

 


Donations - Help Keep This Site Free!

 

| Home | Getting Started | Bank Savings | Equity Instruments | Bonds | Treasury Securities | Agency Securities | Derivatives |
| Funds | Annuities | Value Investing | Growth Investing | Income Investing  | Market Capitalization Strategy
| Momentum Investing | Technical Investing | Buy and Hold Strategy | Buy What You Know | Contrarian Investing | Turnaround Investing |
| Tobin’s Q | Responsible Investing | ADR's  | Global Investing Strategy | The Dow Theory  |  Odd-Lot Theory  |
| Election Cycle Theory  | Dow Dividend Theory | Penny Stocks | IPOs | Dollar Cost Averaging | Drips | Risk Tolerance  |
| Introduction to Fundamental Analysis | Income Statement Analysis | Balance Sheet Analysis | Cash Flow Analysis |
| Shareholders’ Equity Analysis | Ratios and Definitions | Technical Analysis | Type of Charts | Chart Reading | Oscillators |
| Chart Overlays | Chart Patterns | Elliot Wave Theory | Spinella Heart Rate Theory | Fibonacci | The Envelope System |
| Time Value of Money | Exchanges | IndexesAsset Allocation | Retirement Savings | Site Map |

Click here: To save on ordering any of "The Chestnut and Cedar Stock Report's" books.