To make money from investment and financial management, there is a basic skill that must be mastered, which is understanding financial statements.

I.

Basic Composition of Financial Statements Financial statements mainly include the balance sheet, income statement, and cash flow statement.

The balance sheet reflects the company's assets and liabilities at a certain point in time, the income statement reflects the company's operating results over a certain period, and the cash flow statement reflects the company's cash inflows and outflows.

II.

How to Analyze Financial Statements 1.

Balance Sheet In the balance sheet, we can focus on the following points: (1) Asset Quality: By understanding the types, proportions, and liquidity of the company's assets, we can assess the quality and liquidity of the company's assets.

For example, if a company holds a large amount of inventory or accounts receivable, the quality of these assets needs further assessment.

(2) Debt Situation: By analyzing the company's debt structure, debt ratio, and interest expenses, we can assess the company's debt repayment ability and risk level.

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For example, if a company has a high debt ratio, it means that the company needs to pay high interest expenses, which may have a negative impact on the company's profitability.

2.

Income Statement In the income statement, we can focus on the following points: (1) Revenue Quality: By understanding the sources, growth rate, and sustainability of the company's revenue, we can assess the quality of the company's revenue.

For example, if a company's revenue mainly comes from a certain customer or region, then the quality of the company's revenue may be affected by the economic situation of the customer or region.

(2) Cost Structure: By analyzing the company's cost structure, gross margin, and expense ratio, we can assess the company's profitability.

For example, if a company's gross margin is low, the company may need to improve profitability by reducing costs or increasing efficiency.

3.

Cash Flow Statement In the cash flow statement, we can focus on the following points: (1) Cash Inflows and Outflows: By understanding the reasons and amounts of the company's cash inflows and outflows, we can assess the company's liquidity and debt repayment ability.

For example, if a company's cash inflows mainly come from the sale of goods and the provision of services, then the company's liquidity may be affected by market conditions.

(2) Cash Reserves: By understanding the amount and use of the company's cash reserves, we can assess the company's ability to cope with emergencies and seize opportunities.

For example, if a company holds a large amount of cash reserves without a clear purpose, then these cash reserves may become a resource for the company's further development.

Case Analysis (1) Balance Sheet When analyzing the balance sheet, we should pay close attention to the composition of assets, the structure of liabilities, and the changes in shareholders' equity.

Taking Alibaba as an example, its balance sheet at the end of 2022 shows that cash and cash equivalents are 360 billion yuan, accounts receivable are 55 billion yuan, inventory is 15 billion yuan, and fixed assets are only 5 billion yuan.

This composition reflects the characteristics of Alibaba as an internet company, that is, light assets and high liquidity.

(2) Income Statement The income statement mainly reflects the company's profitability.

We need to pay attention to indicators such as operating income, operating costs, and net profit.

Taking Meituan as an example, its financial report for 2022 shows that the annual operating income is 189.1 billion yuan, a year-on-year increase of 33.9%; the net profit is -15.6 billion yuan, but the adjusted net profit is 2.8 billion yuan.

This indicates that although Meituan bears a greater cost pressure when expanding its business and providing services, the overall profit trend is still steadily increasing.

(3) Cash Flow Statement The cash flow statement is an important tool to reflect the company's cash inflows and outflows.

We need to pay attention to the cash flow from operating activities, investing activities, and financing activities.

Taking Tesla as an example, its cash flow statement for 2022 shows that the net cash inflow from operating activities is $3.9 billion, the net cash outflow from investing activities is $1.4 billion, and the net cash inflow from financing activities is $8 billion.

This indicates that while maintaining stable operating activities, Tesla is also continuously investing in future development projects and actively obtaining financial support through financing activities.

(4) The Significance of Comprehensive Analysis of Financial Statements Through comprehensive analysis of financial statements, we can understand the company's asset status, profitability, debt repayment ability, and liquidity.

This information can not only help us assess the company's financial health but also help us predict the company's future development trends.

Taking Apple as an example, its financial report for the first quarter of 2023 shows that revenue is $123.9 billion, a year-on-year increase of 11.1%; net profit is $25 billion, a year-on-year increase of 10.4%.

Although the growth rate has slowed down, it is still at a high level.

This is mainly due to its continued leading position in the global smartphone market and strong brand influence.

At the same time, Apple's financial statements also reflect its excellent capabilities in supply chain management and cost control.

Through the analysis of the above cases, we can see that comprehensive analysis of financial statements can help us understand the company's operating conditions more comprehensively, so as to make more reasonable investment decisions or other related decisions.

What do the three financial statements contained in accounting information reflect about a company?

Which statement is the most important?

Firstly, the income statement actually reflects a company's ability because it is based on benefits.

Secondly, a company's cash flow statement actually reflects a company's vitality.

Having a good cash flow is the foundation for a company to maintain vitality and "do whatever you want."

If your company indeed has profits but no cash flow, it actually can't do anything, and having a pile of accounts receivable is useless.

Of course, you can say "I can cash it in on supply chain finance" and so on, but the cost is actually very high.

The third is the balance sheet, which reflects the strength of a company.

For example, there are two companies, Company A has assets of 1 million yuan and also has a profit of 1 million yuan; another company B has assets of 100 million yuan and also has a profit of 1 million yuan.

When evaluating the two companies, you might think that Company A seems to make more money, but its strength is not as good as that of Company B with 100 million yuan in assets.

We often say "your company is very strong" and what we mean is how many assets this company has.

Which one is the most important among the three statements?

From observing their history, we can know that the balance sheet has a history of nearly 500 years.

The income statement was probably required to be disclosed by the United States and some European countries after 1920.

The cash flow statement only started in 1987.

From this history, we can find that the balance sheet is actually more important than the income statement and cash flow statement.

Because even without the income statement and cash flow statement, people could still calculate and live, but without the balance sheet, it seems to be missing something, which is one perspective.

Another perspective is what is the income statement, the income statement actually reflects a subject in the balance sheet, called the change in undistributed profits; the cash flow statement actually only reflects a subject in the balance sheet, which is the change in cash.

From this perspective, the balance sheet is the core of the three statements, so when we do financial statement analysis, we start with the balance sheet.

What is the most important subject in the balance sheet?

The balance sheet has many subjects, such as a company has a lot of assets, a lot of liabilities and owner's equity, and it is impossible for us to understand all these asset items, liability items, and owner's equity items at once.

We have to understand the most important issues, what is the most important item in the balance sheet?

It can be seen from the following two perspectives.

The first view: a company's assets have seven items, the first is currency, which is cash.

The second is accounts receivable and notes receivable, the third is inventory, the fourth is other receivables, these four are the company's current assets.

Equity investment, fixed assets, and intangible assets are the non-current assets of a company.

The principle of dividing a company's current assets and non-current assets is whether it will be consumed within a year.

If this asset is considered to be digested within a year, we think it is a current asset.

If it is digested in more than a year, it is called a non-current asset, or long-term assets.

2.

In terms of liability items, the most important are two subjects, one is short-term borrowings, and the other is accounts payable and notes payable.

3.

In terms of owner's equity, it is most important to understand the shareholders' investment, mainly the two subjects of share capital and capital reserve, and the precipitation of profits.

The precipitation of profits is reflected in the two subjects of undistributed profits and surplus reserve under China's accounting standards.

There is an important issue, we look at the balance sheet to see about 11 items in total.

First and foremost, the most important are currency, accounts receivable/notes, inventory, and short-term borrowings and accounts payable/notes, because these reflect the vitality of a company.

Vitality means that this company can survive without anything else, through accounts receivable and inventory.

The company can sell inventory and have income, collect accounts receivable and have income, and have currency that can also come back.

From the perspective of liabilities, it depends on how good the company's ability to borrow in the short term is, and how good the ability to owe money to upstream suppliers is, which is accounts payable and notes payable.Secondly, fixed assets and intangible assets reflect a company's potential, which is essentially a matter of production capacity.

Even if a company's products are excellent, vitality is a reflection of the company's product issues.

Its products are good, sell well, and it's easy to get money back.

However, if the production capacity is not up to par, then the profitability cannot be sustained in the long term.

A famous example is the Smartisan phone.

I believe that the Smartisan phone's products are still good, but because of its poor production capacity, it instantly ruined the entire brand.

The third issue is the investment of the company.

Whether the investment situation of the company is good or not mainly depends on the changes in the company's equity investment and the changes in other receivables.

The fourth issue is the problem of motivation.

There are two parts.

The first part is long-term borrowing, the long-term loans from banks to the company.

The second part is the investment from shareholders.

In fact, many companies may not have operational risks or financial risks, but they may have corporate governance risks, and such companies are everywhere.

If the relationship between shareholders is not handled well, it's not that there are no good products, there are products and production capacity, but the relationship between shareholders is not harmonious, which may also lead to the overall financial situation of the company being poor.

The most important duty of the chairman is to balance the relationship between shareholders, which is the problem of motivation.

Whether to finance, if I want to finance, I will finance through long-term loans or issue new shares, how to set the price, these are all issues that the chairman needs to consider.

The general manager should consider the production capacity issue, which is the potential issue of a company.

The company may have good products, but as a general manager, I am more concerned about whether I will have good products next year, the year after, and three years later, which is the long-term production capacity issue of the company.

The vitality part is something that the company's operations director needs to focus on.

He needs to keep an eye on whether the company's products are good, whether the short-term loans borrowed can support the company's operations.

Whether the company owes money to its suppliers, whether the accounts receivable have been collected, these are things that the operations director needs to focus on all day long.

And the investment director needs to look at the investment part.

Therefore, a balance sheet can actually see the strategic map of a company through a few small subjects.

A good company looks relatively harmonious in every part.

There is another way to look at the balance sheet, which is based on the role of assets and the classification of liabilities.

In this classification, we no longer divide current assets, non-current assets, current liabilities, and non-current liabilities, but divide assets into operating assets and investment assets.

If a company claims to be a self-operating company, it must have more operating assets than investment assets.

Its operating assets will definitely have five major operating assets, and the amount will not be small.

The first is cash; the second is commercial claims, mainly accounts receivable and notes receivable; the third is inventory; the fourth is fixed assets; the fifth is intangible assets.

Any company that claims to be a self-operating company must have these five major operating assets.

For investment assets, we mainly look at its long-term equity investment, other receivables, and some prepaid accounts.

What is a prepaid account?

It is that some parent companies first pay for their subsidiaries, allowing the subsidiaries to use them first.

In fact, this is also a kind of creditor's investment behavior.

Looking at the liabilities, in fact, so-called liabilities are a kind of credit, which is divided into two kinds, one is bank credit, and the other is commercial credit.

Bank credit is mainly short-term and long-term loans from banks.

In order to obtain bank credit, we often say that we need to see how the company's "three products" are.

First, whether your company's "character" is good: first look at whether the company's general manager and chairman are reliable, and then investigate whether the team is reliable, and whether the company has had any bad records before, these are all to investigate a company's "character".

Second, whether the company's products are good, how high the gross profit margin is.

Moreover, it is to see the collateral.

Now, banks will ask whether your company has any collateral, and it will definitely do due diligence to see whether this collateral has been mortgaged elsewhere.

Commercial credit is actually very important, it reflects the competitiveness of a company's upstream and downstream.

We do it through notes payable, accounts payable, and advance billing.

Simply put, if this company can owe money to upstream suppliers, but downstream customers cannot owe money to the company, it means that this company is very competitive and has a lot of say in the relationship between upstream and downstream.

It reflects that this company is a good company, and the competitiveness of the company's products is very strong.

How can the "balance sheet" be linked with the "income statement" and the "cash flow statement"?

The first subject to look at is "owner's equity".

Owner's equity is what the shareholders of this company have invested.

The owner's equity will drive a company's "assets".

For example, if my company's shareholders have invested 1 million, and I have borrowed another 1 million from the bank, it means that I have 1 million of shareholder investment, driving 2 million of assets, because I have invested 1 million myself, and I have taken another 1 million from the bank, so I have a total of 2 million.

Shareholder investment drives resources, and this "driving" is actually what we call financial leverage.

Financial leverage = assets ÷ owner's equity, the greater our financial leverage, the greater our driving effect.

After you have a certain amount of assets or resources, whether you can get the market is a big issue.

Many of our state-owned enterprises have a lot of resources, but the market is just not good, and the market cannot be opened.

After having the market and revenue, whether we can get profit and benefit is also a very important issue.

From "owner's equity" to "profit", it is a process of driving "assets" through "owner's equity", and then driving "revenue" to get "profit".

But for us as owners, the most important thing to consider is that I have invested 1 million, how much money have I made.

That is to say, investors are most concerned about the return on equity, also known as ROE, which is the following formula, return on equity = profit ÷ owner's equity.

After a series of index conversions, return on equity = profit margin × asset turnover × financial leverage.

This set of methods is very famous, and all financial analysts know this method, called DuPont analysis method.

From the perspective of looking at financial statements, where to start first, start with the balance sheet, and then we go to analyze the income statement and cash flow statement, these three statements can be connected through the DuPont analysis method.