How to read a balance sheet and find the news

Public companies (those with stock, shares that are traded publicly) must report a raft of filings to the SEC. Why? Imagine no reporting at all. "Trust us!" What would happen? Exactly what has happened! The SEC was not doing its job, not policing the practices of some of this country's largest financial institutions.

Private companies with assets north of $10 million also have to report to the SEC, though not as fully as public companies.

American International Group (AIG)

Latest story on AIG in the NYTimes >> $150 billion bailout, 1 company, highest quarterly loss in U.S. corporate history ($62 billion)

Google's graphic on AIG's performance

How bad is it?

"The government will meanwhile take a preferred stake in the company’s crown assets in its fourth attempt to stanch the flow of problems from the insurance giant. The worldwide life insurance division and the Asian insurance operations are being taken off the block, because they are too hard to sell for a reasonable price in the current market and are essentially being used to repay expensive government loans."


The back story:

Berry Library >> Online resources and databases >> Lexis Nexis Academic >> Business >> "American International Group" SEC filings for the past year >> 10K for December 31, 2013 (This didn't work, either because of Berry IT or surge of demand using Lexis Nexis). Soo..... >> Filings & Forms >> Search for Company Filings >> Most recent filings >> Search box: American International Group; Form Type: 10-K (annual report, which was filed yesterday, March 2) >> success!

First artifact >> Income statement (let's find the problem, or problems)

An income statement is like a little motion picture, showing the flow of money (or revenues) in and out

A balance sheet is like a photo snapshot of the business at the end of its fiscal (not physical, and not necessarily the calendar) year

Let's look at the balance sheet (called "consolidated balance sheet")

The balance sheet will show assets, debts and liabilities. And they have to balance.

Assets = the sum of liabilities and shareholder equity.

We would also want to look at a cash flow statement, which will show how fast the business is spending the money it is receiving and, more importantly, whether that flow is positive or negative (is it receiving more than it is spending on operations, so this would exclude investments. This would be a key if not the key measure for, say, Facebook or Twitter.

Look at cash spent on financing. Debt is good, at least some debt. How? If I pay 3.5% on my house mortgage ($100,000) but am earning 12-15% on Wall Street on another $100,000, which was true before the collapse, then it made sense to borrow in order to invest. This is what all companies do, including AIG. Now all of Wall Street has a negative cash flow, so the market keeps shrinking. I wish I'd paid the house off.

Always read the footnotes. There are news stories in those notes (bankruptcies, litigation, extraordinary circumstances, off-balance sheet transactions)

How do companies make money? Profit margins. By selling for more than it costs to make (or provide).

Typical profit margins
Grocery stores 2%  
Most manufacturing 10-15% Coke: 20-25%, for ex.
Retail 20-30%  
Newspaper publishers 30-40% (historically) the advertising is drying up, moving online
  • 10-Q is a quarterly financial statement
  • 10-K is an annual report

  • Gross sales = all sales
  • Net sales = sales after returns, discounts, reductions
  • Net income = sales minus expenses, including SGA (Selling, General & Administrative Expenses)
  • Operating income = sales minus operating expenses (but not all expenses)

Look for trends in all of these metrics:

  • Revenues
  • Earnings & income
  • Cash flow
  • ROI (return on investment)
  • Assets (and what kinds of assets)

Let's look at a private company. Facebook.

Berry Library >> Online resources and databases >> Lexis Nexis Academic >> Business >> "Facebook" >> Hoover's >> not much

Let's try EDGAR >> Facebook >> filings >> sales of securities (shares in the private company)

Here's what I want you all to do:

Facebook v. Google: For the last complete year reporting period (think 10K here), which company had the most sales or revenues (gross sales or gross or topline revenues)? By how much? Which company was more profitable? By how much? Make sure you're comparing apples to apples.

TimeWarner v. Netflix: Same questions.

HBO v. Netflix: Same questions, but you'll have to use the popular press for this. HBO is a property of TimeWarner and doesn't file 10Ks. But recently, HBO revealed some of its key financial metrics.

Coca-Cola v. Pepsi: Same questions.

Type up your answers and submit Monday in lab.

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