Financial Statements & Accounting Terms

Reports that lay out a company's financial position and results in a standard format. The income statement, balance sheet and cash flow statement are the core three, and listed companies publish them every quarter.

A table showing how much the company sold, how much it spent and how much profit it kept over a period (a quarter or a year). It starts with revenue and works down through operating income to net income.

A table showing what the company owns (assets) at a point in time and where the money to buy those assets came from (liabilities and equity). It is used to judge how sound the company is and how much debt it carries.

A table showing where actual cash came from and where it went over a period, split into operating, investing and financing activities. A company can post an accounting profit and still run short of cash, so look at both.

Assets are everything the company owns (cash, factories, inventory and so on), liabilities are debts it must repay, and equity is the shareholders' share, which is assets minus liabilities. Assets always equal liabilities plus equity.

e.g. With $10 billion in assets and $6 billion in liabilities, equity is $4 billion.

Consolidated statements combine a company and the subsidiaries it controls as if they were one company; separate statements show only the parent company's own numbers. For a company with many subsidiaries, the consolidated basis better reflects the real scale of the business.

The total money a company earns from selling goods or services. For growth companies, how fast revenue is growing is the most important metric.

The direct costs of producing the goods or services that were sold, including raw materials, production labor and factory depreciation.

Gross profit is revenue minus cost of goods sold; gross margin is that figure divided by revenue. It shows how profitable the product itself is and whether the company has pricing power.

e.g. Revenue of $10B and COGS of $6B give gross profit of $4B and a gross margin of 40%

The costs of selling products and running the company, such as advertising, sales and administrative salaries and rent. Gross profit minus SG&A equals operating income.

Money spent developing new technologies and products. It reduces profit now but is an investment in future competitiveness, so tech and biotech companies are watched closely for their R&D as a share of revenue.

Profit from the core business: revenue minus cost of goods and selling and administrative costs. Operating margin is operating income divided by revenue and shows how profitable the business model is.

e.g. Revenue of $10B and operating income of $1.5B give an operating margin of 15%

Spreading the cost of long-lived assets such as factories and equipment over the years they are used, instead of expensing it all at once. It is an accounting expense, but no cash actually leaves the company that year.

e.g. A $1 billion machine used for 10 years is expensed at $100 million per year.

Operating income plus depreciation and amortization, a rough measure of the cash the core business generates. It is handy for comparing asset-heavy companies, but remember it leaves out the burden of capital spending.

Gains and losses that do not come from the core business, such as interest income and expense, foreign-exchange gains and losses and valuation changes on investments. If operating income fell but net income rose, check non-operating items.

The profit left after everything: interest, taxes and one-time gains and losses are all taken out of operating income. It can swing widely because of one-time items, so look at it together with operating income.

The part of consolidated net income that belongs to the parent company's shareholders, after subtracting the share belonging to other shareholders (non-controlling interests) of subsidiaries. This is usually the figure used to calculate PER and EPS.

Net income divided by shares outstanding. When an earnings report says a company "beat expectations," it usually means EPS and revenue came in above analyst estimates.

EPS calculated as if everything that could later turn into shares, such as stock options and convertible bonds, had already become shares. It is more conservative than basic EPS, and U.S. earnings reports are mainly judged on diluted EPS.

The change versus the same quarter a year earlier (YoY) and versus the immediately preceding quarter (QoQ). For industries with seasonal swings in results, year-over-year matters more.

Special gains or costs that will not recur, such as restructuring costs, lawsuit settlements and gains on asset sales. Strip them out to see the company's true underlying performance.

Results recalculated by removing items such as stock-based compensation and one-time costs, at the company's own discretion, from the official numbers under accounting standards (GAAP). Many U.S. companies report them, and market expectations are usually set on this basis. Each company excludes different items, so read them alongside the official figures.

Cash that actually came in from the core business. If a company shows accounting profit but operating cash flow stays negative, check whether sales are on credit or inventory is piling up.

Money spent on long-lived assets such as factories, equipment and data centers. It is an investment in future growth, but if it gets too large it can drain cash and weigh on shareholders.

Operating cash flow minus capital expenditure: the cash the company can use freely. It shows capacity to pay dividends, buy back shares and repay debt.

e.g. $500 million operating cash flow − $300 million CapEx = $200 million free cash flow

The debt ratio is total liabilities divided by shareholders' equity. Net cash is cash on hand minus borrowings; if positive, the company would still have cash left after repaying all its debt.

Current assets (assets convertible to cash within a year) divided by current liabilities (debts due within a year). It shows the ability to pay short-term debts, and below 100% it is worth checking the company's short-term funding position.

Operating income divided by interest expense. It shows how many times over the company can pay its interest from core earnings. Staying below 1x means the company cannot even cover its interest with what it earns.

e.g. $5B operating income and $1B interest expense give an interest coverage ratio of 5x

Net income divided by shareholders' equity. It shows what percentage the company earned in a year on the money shareholders entrusted to it. A consistently high ROE is read as a sign of competitiveness.

Net income divided by total assets. It shows how efficiently the company uses everything it owns to produce profit. Heavy borrowing can lift ROE while ROA stays low, so look at both.

After-tax operating profit divided by the capital actually invested in the core business (operating assets). If ROIC stays consistently above the cost of capital, the company is seen as creating more value as it grows.

Inventory is goods made or bought for sale. Inventory turnover shows how many times a year inventory is sold. If inventory builds faster than sales, it can signal weaker demand or coming price cuts.

Money owed for goods already sold but not yet collected. If sales are rising but receivables are growing much faster, check whether the company is failing to collect on time or booking sales aggressively.

The more fixed costs a company has that do not depend on sales, such as salaries and depreciation, the more operating income swings on even a small change in sales. Industries with large fixed costs, like semiconductors and airlines, see especially big profit swings between booms and busts.

e.g. A company with high fixed costs may see operating income jump more than 30% when sales rise 10%.

Money received in advance for goods or services not yet delivered, so it cannot yet be counted as revenue. At a subscription software company, rising deferred revenue means more future revenue is being stored up.

Tax to be paid or refunded later because of timing differences between accounting profit and taxable income. A company with large losses may also book as an asset the future tax it can avoid paying.

Goodwill is the premium paid over the target's net assets when acquiring another company. If the acquired business does not earn as expected, its value is written down as an expense called an impairment. No cash goes out, but net income drops sharply.

A state in which accumulated losses have pushed equity below the capital shareholders originally put in. When equity falls below zero it is called full capital impairment. In the Korean market, capital impairment can be grounds for an administrative-issue designation or delisting.