Balance Sheet (Part 1)

Once a year publicly listed companies are required to provide an Annual Report to its share holders. This report contains all the pertinent information to inform the share holders about the health of the company. In the beginning of the annual report we find charts followed by a message from the Chief Executive Officer. For the share holders two most important statements in the annual report are 'Balance Sheet" and “Income Statement". Income statement is also known as Profit and Loss Statement". Here I will try to explain some of the items included in the balance sheet.

 We will start with a balance sheet of any one public company.  Here I am going to present balance sheet of Google.

Balance Sheet
View: Annual Data Quarterly Data All numbers in thousands   PERIOD ENDING 31-Dec-08 31-Dec-07 31-Dec-06   Assets Current Assets   Cash And Cash Equivalents 8,656,672 6,081,593 3,544,671   Short Term Investments 7,189,099 8,137,020 7,699,243   Net Receivables 2,928,297 2,376,312 1,352,053   Inventory - - -   Other Current Assets 1,404,114 694,213 443,880   Total Current Assets 20,178,182 17,289,138 13,039,847 Long Term Investments 85,160 1,059,694 1,031,850 Property Plant and Equipment 5,233,843 4,039,261 2,395,239 Goodwill 4,839,854 2,299,368 1,545,119 Intangible Assets 996,690 446,596 346,841 Accumulated Amortization - - - Other Assets 433,846 168,530 114,455 Deferred Long Term Asset Charges - 33,219 -   Total Assets 31,767,575 25,335,806 18,473,351   Liabilities Current Liabilities   Accounts Payable 2,084,006 1,857,529 1,199,451   Short/Current Long Term Debt - - -   Other Current Liabilities 218,084 178,073 105,136   Total Current Liabilities 2,302,090 2,035,602 1,304,587 Long Term Debt 890,115 - - Other Liabilities 294,175 580,276 68,497 Deferred Long Term Liability Charges 42,333 30,249 60,427 Minority Interest - - - Negative Goodwill - - -   Total Liabilities 3,528,713 2,646,127 1,433,511   Stockholders' Equity Misc Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 315 313 309 Retained Earnings 13,561,630 9,334,772 5,133,314 Treasury Stock - - - Capital Surplus 14,450,338 13,241,221 11,882,906 Other Stockholder Equity 226,579 113,373 23,311   Total Stockholder Equity 28,238,862 22,689,679 17,039,840   Net Tangible Assets $22,402,318 $19,943,715 $15,147,880
All the numbers shown above are in thousands. In this blog I will give you details only about the main items. Additional details will be discussed in the future blogs. Look at the second line in the balance sheet under the heading Period Ending. Here the numbers are shown for the years ending in December of 2006, 2007 and 2008.   Let us look at the 10th line with the heading Total Current Assets. Note that the total current assets for the year 2008 were approximately $20 billion, which is more than $17 billion for the year 2007 and $13 billion for the year 2006. This indicates that the company’s results are improving.  Fifth line from the top shows Cash And Cash equivalents. Here also we see $8 billion for the year 2008 which is more than $6 billion for the year 2007 and $3 billion for the year 2006. These numbers also show that the company has good amount of cash to take care of unforeseen circumstances.

Balance Sheet (Part 2)

Now look at the 18th line from the top under the heading Total Assets. For the year 2008 total assets were approximately $31 billion which is more than the prior years of 2007 and 2006. At first glance these numbers show an improvement too, but without looking at individual numbers under this heading we cannot say for sure. Note that the amounts for "Property Plant and Equipment" and "Goodwill" have increased from prior years. If we needed to raise cash in a short period of time then we may not be able to get even half of the amounts shown.    Now let us go to the 24th line from the top under the heading Total Liabilities. Total liabilities are close to $2 billion or less for all the three years. In comparison to total current assets of $20 billion for the year 2008, the total current liability of $2 billion is negligible. That shows the company is in a solid footing to overcome any difficulties.    Now let us turn to the 30th line from the top under the heading of Total Liabilities. Here the total liabilities are approximately $3 billion or less for all the three years, so there is nothing to worry.   Now let us look at the 41st line from the top under the heading Total Stockholder Equity. Corresponding numbers in these columns are arrived at by subtracting the total liabilities from the total assets. What this means is that the total assets are equal to the sum of total liabilities and the total stockholder equity.   If we look at "key statistics" in "yahoo Finance" we find that Google has 315.29 million "outstanding shares". Dividing the total stock holder equity in the year 2008 by the outstanding shares, we arrive at share holder equity to be $89.56/share. Closing price of one share of Google on April 16 2009 was $388.74/share. Now if we divide closing price of $388.74 by $89.56 per share holder equity we get a value of 4.34. This indicates that people are willing to pay more than 4 times the equity in the company for a share of Google. At the end of 2007 this number was close to 8, almost double the value of 4.34. Even if the economy is not in any worst shape compared to the end of 2007, people’s perception is that the economy is in a very bad shape, so they are willing to pay only half the value.    Now let us look at the last line in the balance sheet under the heading Net Tangible Assets. For the year 2008 this number was $22 billion. Net tangible assets is calculated as the total assets of a company, minus any intangible assets such as goodwill, patents and trademarks, less all liabilities and the par value of preferred stock. Net asset value is also known as Book Value. Posted by Nick M. Shah at 9:37 PM 0 comments

Price Earning Ratio (P/E Ratio) explained in layman's language

Price Earning Ratio is a ratio of price divided by earnings.  Price is the published value of one share.  Earning applies to the earning per share.  P/E value is also available in Google finance or Yahoo finance.  Why is P/E ratio an important ratio? We always look in our past and many a times make decisions based on our past experience. In our mind we have stored past information about these ratios. For different industries and sectors we assign different number for this ratio. For example we do not assign the same number for financial industry as we do for technology industry. We may be comfortable with a price earning ratio of 20 or 30 in technology. In the past these ratios have even reached 100 and 200 as it happened in the year 2000. In financial this kind of ratios will be troubling and we may be comfortable with a ratio of 7 to 15.

Generally speaking we are looking for a lower P/E ratio. What happens if all of a sudden the earnings disappear and becomes zero. If a price is 20 and earning is zero then the ratio will be 20 divided by zero which is an infinite number. In this case should we decide to dump the stock of this company? Not necessarily. We have to look for the other factors before we make such a decision. Price earning ratio is not the only factor we should rely on to make our decisions.

In a troubling economy like the one we have now, price earning ratio for each and every industry and sector has come down. If the economy improves and people feel more confident about the economy then even without earning going up we would be ready to assign a higher number for this ratio as we did in 1999 and 2000. In this case even without earning going up price of the stock will go up.

Now let us look at the financial companies like J P Morgan, Wells Fargo, Bank of America or Citibank which have really suffered in this economy. Assuming that these banks are not nationalized, billions of dollars our government has poured in these companies along with the refinancing boom at a very low interest rate would be a real boom to the earnings of these financial institutions. Banks are on the mend, with the help from low interest rates, fat lending margins, dwindling competition and lending in the financial markets.

As I mentioned previously if all of these factors improve the earning power of these banks, then the P/E will go down and the price of the stock will go up.  Earning could still suffer because of credit card defaults, commercial borrowers default and write down of toxic assets which would require banks to borrow money from the government or private sources.

Please note that P/E is an important factor in your decision but is not the only factor.

Where can you find a P/E ratio? You can go either at www. googlefinance.com or www.finance.yahoo.com and type in the symbol of the company to find a P/E ratio.