Financial Statements

The Income Statement

Crow River Investment Club www.bivio.com/crowriver

Introduction to this Series

This is first of 4 short overviews 3 Main Financial Statements:
Income Statement Balance Sheet Cash Flow Statement

Finally, Annual Report Worksheets

By Bob Adams By Paul Schneider

Income Statement: The Basics

1. Financial analysis is about Comparison. Thats why these statements all come with more than one year of data. 2. The Income Statement (or Profit & Loss Statement) reports the income, expenses and profits for a specific period of time.

Income Statement: The Basics

3. Product Companies report Net Sales 4. Service Companies report Net Revenues. 5. Net Sales & Revenues are the same thing. 6. Net means after the return of defective products.

Income Statement: The Basics

7. Everything on the Income Statement can be expressed as a percentage and compared to competitive companies. 8. Everything on the Income Statement can be compared as a percentage to Net Sales or Revenues.

Income Statement: The Basics

9. Companies are valued based on the cash produced from core operations (or Operating Income). 10.Focus your attention on the core business. What business is the company in? How much money did that business generate or cost?

Income Statement: The Basics

11.Finally, be aware of income and expenses that are not generated from the core business. 12.If a company restructures, or takes onetime gains and losses annually, they are no longer one time, are they??

The Anatomy of an Income Statement

Net Sales or Revenues - Cost of Goods Sold = Gross Profit Gross Profit divided by Sales = Gross Margin, the percentage of every dollar it costs to produce sales.

Comparing Business Models

Lets compare Mentor (MNTR) with Factset (FDS) 2002 annual figures: MNTR $321,062 $130,455 $190,607 59% FDS $205,853 $ 67,947 $137,906 67%

Net Sales Cost of Sales Gross Profit Gross Margin

Which one has a more profitable business model?

Whats Next?
Other Operating Expenses, such as:
Utilities Labor Costs Advertising

Then, Other Income & Expenses, such as:

Short-term Investments Royalties on Patents Payment on a Lawsuit Foreign Exchange Rate deficit Interest Income & Expenses

The Anatomy of an Income Statement

SO Gross Profit - SG&A Expenses + Other Income - Other Expenses = Income Before Income Taxes This is an important SSG figure!

Taxes?
Why do we look at pre-tax income?
Companies have no control over taxes Taxes vary from state to state Taxes dont show the true picture Various industries are taxed differently Tax credits skew year-to-year earnings

Taxes have their own line on the Income Statement.

The Anatomy of an Income Statement

So Income Before Taxes - Provision for Income Taxes = Net Income

The Anatomy of an Income Statement

And
Net Income divided by Shares Outstanding = Earnings Per Share or EPS Diluted Earnings Per Share: The value of each share after the effects of stock options and convertible shares and bonds have been taken into consideration.

Income Statement Ratios

Which Ratios are Important? Gross Margin: Sales Cost of Sales div. by Sales
How profitable is this business model? Is it more profitable than its peers? Is it getting more profitable from year-to-year?

Income Statement Ratios

Which Ratios are Important? Net Margin: Net Income divided by Net Sales
Is there any money left over for the shareholders after all expenses and taxes are paid? Is Net Margin growing from year-to-year? How does it compare to its competitors?

Income Statement & the SSG

Sales These are the items required on the Quarterly - Cost of Goods Sold Data Update Screen & - SG&A Expense PERT Report +Other Income - Other Expenses = Income Before Taxes - Income Taxes = Net Income (div. by Shares Outstanding) = Earnings Per Share (EPS)

A Quick Look at FactSet

2002 Commissions Cash Fees Total Revenue Cost of Services SG&A Expenses Total Op. Expenses Net Income Diluted EPS Shares Outstanding $ 62,196 $143,657 $205,853 $ 67,947 $ 75,084 $143,935 $40,848 $ 1.17 34,862 2001 $ 56,462 $120,226 $176,688 $ 61,576 $ 64,209 $125,785 $ 33,401 $ .96 34762 Change + 10% + 19% +16.5% + + + + + 10% 17% 14% 22% 22% 0%

A Quick Look at FactSet

2002 Total Revenue - Cost of Services Div. By Revenues = Gross Margin Net Income Div. By Revenue = Net Margin $205,853 $ 67,947 $137,906 67% $ 40,848 $205,853 19.8% 2001 $176,688 $ 61,576 $115,112 65% $ 33,401 $176,688 18.9%

Are they getting better!!?

Next Month: The Balance Sheet

The End