FUNDAMENTAL ANALYSIS - FINANCIAL STATEMENTS

INCOME STATEMENT:

William O’Neil’s CAN SLIM investment strategy screens for corporations with strong fundamentals. 

The first three of the seven parts of the CANSLIM mnemonic are as follows:

• C stands for Current earnings per share; current earnings should be up 25% or more.   Additionally, if earnings are accelerating in recent quarters, this is a positive prognostic sign.

• A stands for Annual earnings, which should be up 25% or more in each of the last three years. Annual returns on equity (ROE) should be 17% or more.

• N stands for New product or service, which refers to the idea that a company should have a new basic idea that fuels the earnings growth seen in the first two parts of the mnemonic. This product is what allows the stock to emerge from a proper chart pattern of its past earnings to allow it to continue to grow and achieve a new high for pricing. A notable example of this is Apple Computer’s Mini iPad which can be listed by product line on an Income Statement.

Income statement (also referred to as profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as Net Profit or the "bottom line").
 
It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.  Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses.

The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.

 

BALANCE SHEET:

A balance sheet is often described as a "snapshot of a company's financial condition".   Of the basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.

A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.

A corporate balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt.  Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The corporation's equity is the difference between total assets and total liabilities.

^{Ideally, a balance sheet would include large amounts of cash and or cash equivalents like investments and minimal debt to prevent the surprise of a secondary offering diluting the share price.}

CASH FLOW STATEMENT:

                
The (total) net cash flow of a company over a period (typically a quarter or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow is the sum of cash flows that are classified in the below areas:

• Operational cash flows: Cash received or expended as a result of the company's internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent.
• Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets).
• Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments.
•  Net Free Cash Flows: Operation Cash flow – Capital Expenses to keep current level of operation – dividends – Current Portion of long term debt – Depreciation 

Free Cash Flow (FCF) is cash flow available for distribution among all the securities holders of an organization.

• Ideally,  investors seek both positive Operational and Free Cash flow.