The Balance Sheet

Crow River Investment ClubMay 13, 2003

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References

Starting and Running a Profitable Investment Club – Thomas E. O’Hara Kenneth S. Janke, Sr.The Motley Fool Investment WorkbookA Balance Sheet (in this case, Lowe’s)www.investorwords.com

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Agenda

DefinitionsWhat is a balance sheet?What do the terms mean?

AnalysisWhat do I look for?

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What is it?

Reports the financial condition of a company at a specific point in timeRequired to report every three monthsThree key areas:

Assets (What it owns)Liabilities (What it owes)Shareholders’ equity

Assets = Liabilities + Shareholders’ Equity

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Basic Terms - Assets

Current AssetsCan be turned into cash quickly (within 12 months)Examples

• Cash, investments• Accounts Receivable (Bills due to the company)• Inventories• Interest payments on cash in the bank

Fixed AssetsAlso long-term assets, property, plant, and equipment

Depreciation

Growth in these areas should generally not outpace sales

Assets Example - LOW

Current Assets: FY02 FY01Cash and Cash Equivalents $853 $799Short Term Investments $273 $54Accounts Receivable – Net $172 $166Merchandise Inventory $3968 $3611Deferred Income Taxes $58 $93Other Current Assets $244 $197Total Current Assets $5568 $4920Property (Less Accumulated Depreciation) $10352 $8653Long-Term Investments $29 $22Other Assets $160 $141Total Assets $16109 $13736

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Basic Terms – Liabilities

Current LiabilitiesCash the company must pay in the next 12 months

• Examples Accounts Payable (Bills the company owes) Lease payments, short-term loans Accrued Taxes Accrued wages, interest, and other expense

Long-term LiabilitiesDebt due in the years ahead vs. the current year

Liabilities Example - LOW

Current Liabilities: FY02 FY01Short Term Borrowings $50 $100Current Maturities of LT Debt $29 $59Accounts Payable $1943 $1715Employee Retirement Plans $88 $126Accrued Salaries and Wages $306 $221Other Current Liabilities $1162 $796Total Current Liabilities $3578 $3017LT Debt (Excluding Current Maturities) $3736 $3734Deferred Income Taxes $478 $305Other LT Liabilities $15 $6Total Liabilities $7807 $7062

So what?

What’s good?Plenty of cashNon-cash current assets that are droppingRising current liabilities (unpaid bills for which cash is on hand)

It’s better if the company is holding onto cash as long as possible

What’s bad?Rising InventoriesRising receivables

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Basic Terms – Shareholders’ Equity

Represents the ownership of the companyCommon StockPreferred StockSurplus

Capital or Paid-in surplusRetained Earnings or Earned SurplusPrepaid Expenses or deferred chargesIntangible AssetsReserves for contingencies

Shareholders’ Equity Example - LOW

Shareholders’ Equity: FY02 FY01Preferred Stock - $5 Par Value, none issuedCommon Stock - $.50 Par Value

Shares Issued and OutstandingJanuary 31, 2003 782February 1, 2002 776 $391 $388

Capital in Excess of Par Value $2023 $1803Retained Earnings $5887 $4482Accumulated Other Comprehensive Income $1 $1Total Shareholders’ Equity $8302 $6674Total Liabilities and Shareholder’s Equity $16109 $13736

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What to Look For

Working Capital – do they have liquidity to build their business?= Current Assets – Current Liabilities

Current Ratio (Also Working Capital Ratio)= Current Assets/Current Liabilities

Acid Test – excluded inventory and therefore focuses on short-term obligations

Inventory Turnover= COGS/Average Inventory at Cost

If it’s increasing – it means the company is selling fasterPlant Turnover= Sales/(Property, Plant, and equipment)

Book Value – more important to value investors= Stated Value of the common stock + retained earnings + surplus

reserves

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What to Look For

Bond Ratio – 30-40%+ is badPreferred Stock RatioCommon Stock RatioLeverage

Ratio of bonds to preferred stock

Long-Term Debt/Equity RatioShows how much creditors own versus shareholders

Ratio’s and Analysis Examples

Working CapitalFY02: $8302 FY01: $6674

Current Ratio (Also Working Capital Ratio)FY02: 2.1 FY01: 1.9

Book ValueFY02: 6278 FY01: 4870

LT Debt/Equity RatioFY02: .45 FY01: .56

Next Month: The Cash Flow Statement