1 00:00:00,000 --> 00:00:04,375 All right, so we both know that you're a pro when it comes to corporate finance, but today we're taking 2 00:00:04,375 --> 00:00:13,541 this deep dive into financial statement analysis. And the twist is we're going way beyond just what you 3 00:00:13,541 --> 00:00:18,875 see in a textbook. We're going to look at actual companies. And we're going to use their financials to 4 00:00:18,875 --> 00:00:25,958 understand how to spot opportunities, assess risks, the whole nine yards, so you can ultimately make 5 00:00:25,958 --> 00:00:30,375 smarter decisions. It's like a financial health checkup. Yeah, exactly. It's like a financial health 6 00:00:30,375 --> 00:00:35,333 checkup for some of the biggest names out there. For some of the heavy hitters. Yeah. Yeah. Apple, 7 00:00:35,375 --> 00:00:40,583 Tesla, Amazon. Oh yeah, we're talking big. Product-yums. So, okay, before we get into the nitty gritty 8 00:00:40,583 --> 00:00:47,041 of specific companies, let's just do a real quick recap of what the three major financial statements 9 00:00:47,041 --> 00:00:51,875 are all about. Sure. Income statement, balance sheet, cash flow statement. You're probably pretty 10 00:00:51,875 --> 00:00:57,208 familiar with these, but it never hurts to kind of refresh, right? Absolutely. Yeah, always good to 11 00:00:57,208 --> 00:01:03,666 have a refresher. Okay, so... The income statement, think of it as like a company's report card. Okay. 12 00:01:03,916 --> 00:01:11,416 It shows how they've been doing over a certain amount of time, and it highlights things like their 13 00:01:11,416 --> 00:01:18,666 revenue, their expenses, and then ultimately that bottom line, the net income. Yeah, yeah. So, that 14 00:01:18,666 --> 00:01:24,000 tells you how much profit or loss they've made. So if you're thinking about investing in a company, 15 00:01:24,000 --> 00:01:28,250 you're definitely going to want to look at that income statement, right? Absolutely. So, that's the 16 00:01:28,250 --> 00:01:32,666 goal they've been. Yeah. Okay, now we've got the balance sheet, and this is always what I kind of 17 00:01:32,666 --> 00:01:37,791 picture as like a snapshot in time. Right, right. It's like we freeze everything and just get a glimpse 18 00:01:37,791 --> 00:01:43,125 of what they own, which is the assets, and then what they owe the liabilities. And the difference 19 00:01:43,125 --> 00:01:48,625 between those two is basically what represents the shareholders' equity. Right, right. Okay, so you 20 00:01:48,625 --> 00:01:55,541 would look at a balance sheet to see if a company has enough assets to cover its debts. Absolutely, 21 00:01:55,750 --> 00:02:00,541 yeah. Which can give you an idea of like their financial risk. It's a big one. Okay, and then finally 22 00:02:00,541 --> 00:02:05,750 we've got the cash flow statement. Right. Which, as the name suggests, is all about where the cash is 23 00:02:05,750 --> 00:02:11,041 flowing in and out of the company. Exactly, and this one's really important. Yeah. Because it shows you 24 00:02:11,041 --> 00:02:16,500 how they generate cash from their operations. Okay. How they invest that cash. Right. And how they're 25 00:02:16,500 --> 00:02:22,375 financing their activities. Mm-hmm. So, it can tell you a lot about their ability to generate cash, to 26 00:02:22,375 --> 00:02:28,250 fund their growth, to pay dividends, all that time. So, this is like the big point here. Yeah. These 27 00:02:28,250 --> 00:02:35,083 statements don't just exist in isolation from each other. No. It's when you start analyzing them all 28 00:02:35,083 --> 00:02:39,291 together that you really start to see some insights, right? That's where the magic happens, really, is 29 00:02:39,291 --> 00:02:44,583 it's like putting together a puzzle, right? Yeah. Each statement provides a piece, and when you combine 30 00:02:44,583 --> 00:02:51,500 them, you get that full picture of how healthy a company is financially. Yeah, yeah. And to really 31 00:02:51,500 --> 00:02:57,500 unlock the secrets within these statements, and we have to use things like ratio analysis. Ugh, yes. 32 00:02:57,750 --> 00:03:03,041 Ratio, okay. So, ratios, these help us make sense of the numbers by comparing them in different ways, 33 00:03:03,041 --> 00:03:07,791 right? So, we can compare a company's performance over time, maybe benchmark them against their 34 00:03:07,791 --> 00:03:14,708 competitors. Right. Even spot potential red flags. Exactly. Before they become huge problems. Yeah, 35 00:03:14,708 --> 00:03:20,333 exactly. Like before they blow up. Yeah, yeah. One of the most commonly used ratios is the debt to 36 00:03:20,333 --> 00:03:28,833 equity ratio. Yeah. And this helps us assess a company's financial leverage. Okay. So, let's take 37 00:03:28,833 --> 00:03:34,875 Netflix, for example. Okay. They've relied a lot on debt to fund all their content production. Yeah, 38 00:03:34,875 --> 00:03:41,000 all those original shows. All those shows, right. So, back in 2017, their debt to equity ratio was over 39 00:03:41,000 --> 00:03:48,541 4.5x. Wow. Meaning, they had significantly more debt than equity. So, they were really going all in. 40 00:03:48,541 --> 00:03:53,625 They were going for it, yeah. But that amount of debt has to come with some risks, right? Absolutely. 41 00:03:53,875 --> 00:03:59,583 High leverage can be great for growth, but it can also make a company really vulnerable, especially if 42 00:03:59,583 --> 00:04:04,541 their growth slows down. Yeah. And that's exactly what we saw with Netflix in 2022. They had that big 43 00:04:04,541 --> 00:04:11,166 subscriber slump. Right. And that raised concerns because when your revenue growth kind of stalls, it's 44 00:04:11,166 --> 00:04:17,041 a lot harder to service all that debt. Right, right. That makes sense. So, a high debt to equity ratio 45 00:04:17,041 --> 00:04:23,000 that might be like a little warning sign. It could be, yeah. That a company is taking on too much risk. 46 00:04:23,875 --> 00:04:29,041 Especially in a fast changing industry like streaming. Yeah, yeah, for sure. And that's just like one 47 00:04:29,041 --> 00:04:34,625 example of how these ratios can help you really dig into a company's financials. Yeah. But we also have 48 00:04:34,625 --> 00:04:40,958 to consider trends over time too, right? Absolutely. Trend analysis is crucial because it can show us 49 00:04:40,958 --> 00:04:46,708 those patterns and you can kind of spot those turning points. Okay. Let's look at Meta, you know, 50 00:04:46,708 --> 00:04:53,833 formerly Facebook. Yeah. Their revenue growth looks amazing on the surface. It went from $56 billion in 51 00:04:53,833 --> 00:05:04,625 2018 to over $113 billion in 2022. That's incredible. Right. That's huge growth. It is. But there's 52 00:05:04,625 --> 00:05:12,625 always more to the story. No, I bet there is. So during that same period, their costs and expenses also 53 00:05:12,625 --> 00:05:18,333 shot way up. Really? And that's because of all their big investments in the Metaverse and AI. Yeah. So 54 00:05:18,333 --> 00:05:23,458 this raises an important question for investors. Okay. Can they keep up this kind of revenue growth 55 00:05:23,458 --> 00:05:28,875 while they're pouring billions into these new ventures? That's a big question. Yeah. It's something you 56 00:05:28,875 --> 00:05:34,291 really want to think about carefully before making any investment decisions. For sure. Yeah. So, you 57 00:05:34,291 --> 00:05:39,291 know, you see that even with a company like Meta, right? Right. That seems like they can do no wrong. 58 00:05:39,500 --> 00:05:44,791 You can't just look at like the top line revenue growth. Exactly. Those ballooning costs. I mean, 59 00:05:44,791 --> 00:05:50,833 whether it's for the Metaverse or AI, it really adds like a layer of complexity. It does. And even with 60 00:05:50,833 --> 00:05:57,125 like the straightforward metrics like revenue and expenses, context is everything. Okay. Take 61 00:05:57,125 --> 00:06:02,208 inflation, for example. If a company's costs are going up because of inflation, that might not be a 62 00:06:02,208 --> 00:06:08,333 sign of like bad management. Yeah. Might just be the economy. So it's about connecting the dots, right? 63 00:06:08,666 --> 00:06:13,750 Absolutely. We can't just look at these statements like in a vacuum, right? You have to think about all 64 00:06:13,750 --> 00:06:19,958 these other forces. You have to think, are these changes because of something internal? Yeah. Or are 65 00:06:19,958 --> 00:06:25,666 they driven by inflation, interest rates, what's going on globally? It's like you're a financial 66 00:06:25,666 --> 00:06:30,916 detective. Yeah. That's a great way to put it. You're gathering clues, trying to piece together the 67 00:06:30,916 --> 00:06:37,458 whole story. That's it. But, you know, detectives have to be careful about like misleading information. 68 00:06:37,875 --> 00:06:42,500 Oh, for sure. And companies, well, they can be a little creative sometimes. Absolutely. They can be 69 00:06:42,500 --> 00:06:47,875 accounting to try to make things look a little rosier than they actually are. That happens all the 70 00:06:47,875 --> 00:06:53,125 time. So what are some of those red flags we should be watching out for? What could suggest that maybe 71 00:06:53,125 --> 00:06:59,458 something fishy is going on? Well, you know, if a company suddenly changes their accounting policies. 72 00:07:00,000 --> 00:07:04,750 That's always a bit of a red flag. Yeah. Also, if their revenue is growing way faster than everyone 73 00:07:04,750 --> 00:07:10,833 else in their industry, that might be worth a closer look. Yeah. Of course, like any unexplained 74 00:07:10,833 --> 00:07:16,000 transactions or things that just don't seem to add up. Right. So anything that's just too good to be 75 00:07:16,000 --> 00:07:21,666 true or it doesn't make sense. Exactly. You always got to be a little skeptical. Yeah. Trust but 76 00:07:21,666 --> 00:07:29,291 verify, as they say. So speaking of decisions, let's bring this back to the real world. How can we 77 00:07:29,291 --> 00:07:36,666 actually use all this financial statement analysis to make better decisions, whether we investors or 78 00:07:36,666 --> 00:07:43,291 running our own business? So if you're thinking about investing in a company, it's kind of like doing 79 00:07:43,291 --> 00:07:49,125 your due diligence before you buy a house. You wouldn't buy a house without getting it inspected. No 80 00:07:49,125 --> 00:07:53,375 way. You want to make sure the foundation's good, no hidden problems. You want to be sure you're making 81 00:07:53,375 --> 00:07:57,625 a good investment, not like a gamble. Exactly. And it can be 82 00:07:57,625 --> 00:08:01,541 just as valuable if you're making decisions inside a company. 83 00:08:02,708 --> 00:08:04,916 So say you're a manager and you're trying to decide if 84 00:08:04,916 --> 00:08:07,666 you should launch a new product or expand into a new market. 85 00:08:08,791 --> 00:08:14,000 Looking at your financials can really help you figure out if you have the resources to do it. So it's 86 00:08:14,000 --> 00:08:19,916 like using the numbers to kind of inform your strategy. That's a great way to put it. Make decisions 87 00:08:19,916 --> 00:08:26,250 that are backed up by data. And by tracking your performance over time, you can really see what's 88 00:08:26,250 --> 00:08:31,916 working, what's not and make changes as you go. It's like having a financial GPS. I love that, a 89 00:08:31,916 --> 00:08:39,208 financial GPS. Yeah, guiding you to success. But even the best GPS can't predict everything, right? 90 00:08:39,625 --> 00:08:43,666 That's true. There are things that the numbers can't tell you. Right. We can't forget about the 91 00:08:43,666 --> 00:08:49,375 qualitative side of things. Things like how good is the management team? What's their reputation like? 92 00:08:49,833 --> 00:08:52,541 What are their competitive advantages? What's going on in the industry? 93 00:08:53,208 --> 00:08:57,333 Even things like regulatory changes. Those can all have a huge impact. 94 00:08:58,458 --> 00:09:05,208 So it's like looking at a beautiful house, but not realizing that the foundation is on shaky ground. 95 00:09:05,791 --> 00:09:11,833 That's a perfect analogy. Yeah. A company could have amazing numbers, but if they have a bad reputation 96 00:09:11,833 --> 00:09:17,500 or their industry is going downhill, those numbers might not be telling the whole story. So how do we 97 00:09:17,500 --> 00:09:26,500 incorporate those qualitative factors into our analysis? It's hard to put a number on things like 98 00:09:26,500 --> 00:09:32,791 reputation or management competence. It's definitely a challenge. There's no easy answer. It takes 99 00:09:32,791 --> 00:09:39,250 research, critical thinking, and honestly a bit of intuition too. So we really have to do our homework. 100 00:09:39,791 --> 00:09:46,916 Read industry reports, talk to experts. Really try to understand the company's position. And ask the 101 00:09:46,916 --> 00:09:51,291 right questions like what are their strengths and weaknesses? What opportunities are out there? What 102 00:09:51,291 --> 00:09:57,083 threats are they facing? What's their strategy and are they actually executing it? So it's about going 103 00:09:57,083 --> 00:10:02,708 beyond just the balance sheet and getting a feel for the company as a whole. And that's where 104 00:10:02,708 --> 00:10:08,500 experience and judgment come in. There's no formula for this part. It's more of an art than a science. 105 00:10:09,250 --> 00:10:17,000 It's like an essential art. It is. If you want to master this by combining the rigorous analysis with a 106 00:10:17,000 --> 00:10:22,625 real understanding of those qualitative factors, you can get a really complete picture. And that's what 107 00:10:22,625 --> 00:10:27,750 makes a good analyst great, right? I think so. It's not just crunching numbers. It's understanding the 108 00:10:27,750 --> 00:10:33,166 story they're telling you and using that knowledge to make good decisions. Okay. So we could talk about 109 00:10:33,166 --> 00:10:39,708 this forever, but we are running a little short on time for today's deep dive. But before we wrap up, I 110 00:10:39,708 --> 00:10:44,750 do want to leave our listener with one final thought. Okay. I'm all ears. What is it? Think of 111 00:10:44,750 --> 00:10:49,375 financial statements like a window into a company's soul. 112 00:10:50,583 --> 00:10:57,416 They show you their values, their priorities. Wow. That's a powerful way to put it. Yeah. Their 113 00:10:57,416 --> 00:11:04,250 strengths, their weaknesses. Yeah. And to read these statements. We can understand not just their 114 00:11:04,250 --> 00:11:09,833 financial health, but also their character. Exactly. And that can be incredibly valuable. Not just for 115 00:11:09,833 --> 00:11:15,875 financial decisions, but for just understanding how business works. So let's all go out there and be 116 00:11:15,875 --> 00:11:23,083 these master interpreters of financial souls, using our knowledge to make the world a little bit 117 00:11:23,083 --> 00:11:28,166 better. I love that. And on that note, I think it's time to wrap up this deep dive. 118 00:11:29,541 --> 00:11:34,000 All right. That's a wrap for today. Yeah. Thanks for joining us. That was a really interesting point 119 00:11:34,000 --> 00:11:39,708 you made about financial statements being like a window into a company's soul. Yeah. It really makes 120 00:11:39,708 --> 00:11:44,791 you think about how there's actual people behind all these numbers. Exactly. And that kind of brings us 121 00:11:44,791 --> 00:11:49,875 to another important part of doing this kind of analysis. Okay. Understanding the people who are 122 00:11:49,875 --> 00:11:54,208 actually running the company. So you're talking about the management team. Yes. Exactly. 123 00:11:55,625 --> 00:12:03,041 Ultimately, companies are run by people. And those people, they make decisions that can make or break 124 00:12:03,041 --> 00:12:10,833 the company. So even if a company's numbers look great on paper, we should still be thinking about 125 00:12:11,833 --> 00:12:17,125 how good is the leadership? Absolutely. You want to look at their track record, their experience, their 126 00:12:17,125 --> 00:12:25,875 vision for the future. Are they competent? Do they have integrity? Do they have a plan for dealing with 127 00:12:25,875 --> 00:12:30,791 all the challenges and opportunities that are out there? It's like a ship with a great engine isn't 128 00:12:30,791 --> 00:12:33,625 going to get very far if the captain doesn't know where they're 129 00:12:33,625 --> 00:12:37,750 going. Exactly. And it's not just the top executives either. Oh, okay. 130 00:12:38,791 --> 00:12:42,458 The quality of the whole workforce matters. Their 131 00:12:42,458 --> 00:12:45,666 skills, their motivation, how well they can adapt to change. 132 00:12:46,791 --> 00:12:51,250 All of that stuff can affect a company's performance even if you don't see it directly in the 133 00:12:51,250 --> 00:12:56,125 financials. So we have to think holistically then, right? Yes. Not just numbers. Not just numbers. But 134 00:12:56,125 --> 00:13:00,333 the people too. Exactly. Okay. But there's one more piece of the puzzle we haven't really talked about 135 00:13:00,333 --> 00:13:06,375 yet. The broader economic environment. Right. Even the most financially stable company can be hit by 136 00:13:06,375 --> 00:13:11,875 things that are totally outside of their control. Like what kinds of things? I mean, think about the 137 00:13:11,875 --> 00:13:17,833 pandemic, supply chain problems, interest rates going up. All of that can have a huge impact on a 138 00:13:17,833 --> 00:13:23,041 company no matter how good their numbers look. So you're saying we can't just analyze the numbers on 139 00:13:23,041 --> 00:13:29,291 their own. We need to understand the big picture. You got it. The macroeconomic stuff that's happening. 140 00:13:29,291 --> 00:13:34,791 You have to think about inflation, interest rates, consumer competence, government regulations. All of 141 00:13:34,791 --> 00:13:40,875 that can affect a company's ability to succeed. And we can't forget about competition either, right? 142 00:13:40,875 --> 00:13:47,708 Oh, absolutely not. Like a company could have awesome financials. But if they're up against some fierce 143 00:13:47,708 --> 00:13:53,125 rivals or if their industry is shrinking, that's a problem. You need to know who they're competing 144 00:13:53,125 --> 00:13:59,083 with. Yeah. What their strengths and weaknesses are. How do they stack up? Are they innovating? Are 145 00:13:59,083 --> 00:14:04,708 they gaining market share? Are they keeping up with the times? It's a lot to think about. That is. So 146 00:14:04,708 --> 00:14:10,208 financial statement analysis is really like just the beginning. It is the starting point. We need to 147 00:14:10,208 --> 00:14:15,083 understand the company, the industry, the whole economic landscape. We got it. It's a really smart 148 00:14:15,083 --> 00:14:20,458 decision. I couldn't agree more. This whole deep dive has been so eye-opening. I feel like I have a 149 00:14:20,458 --> 00:14:28,250 much better handle on how to do this kind of analysis and use it to actually make better decisions. 150 00:14:28,666 --> 00:14:34,375 That's great to hear. And remember, this is a journey, not a destination. Keep learning, keep asking 151 00:14:34,375 --> 00:14:39,291 questions, keep getting better. The more you understand about finance, the better equipped you'll be to 152 00:14:39,291 --> 00:14:46,125 handle whatever comes your way. Well said. I think on that note, it's probably time to wrap up this 153 00:14:46,125 --> 00:14:49,625 deep dive. Sounds good. Thanks for joining us on this journey 154 00:14:49,625 --> 00:14:52,291 into financial statement analysis. We hope you found it useful.