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How to analyze company reports. Part 1

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In this article, we would like to pay attention to such an important topic as analyzing company reports. What is revenue? Net income? And equity investments? You will find answers to these questions below. Part 1.

Why is it important to be able to analyze the companies’ reports?

Evaluation of company reports is one of the most important parts of the stock exchange business. Thanks to this activity, we can find out detailed information about the company’s income, losses, debts, and assets, and build a more appropriate trading strategy according to this.

There are two types of reports:

  • 10-Q-quarterly.
  • 10-K-annual.

3 main sections are worth a look at the start.

Firstly, you need to find the Consolidated Statements of Income section. This is the company’s earnings report.

The first thing you should pay attention to is the Revenue graph, or sometimes it is called Total Revenue. This is the company’s total revenue for the reporting period.

Next, 2 concepts such as Cost of Sales and Gross margin.

Cost of Sales is the cost of sales.

Gross Margin is the gross profit.

Imagine that a company sold 1 processor for $100.

So, $100 is the revenue.

But to create this processor, the company spent $70.

Thus, $70 is the cost of sales.

And the company has $30 left — this is the gross profit.

That is profit due to the markup on the product. This does not yet include taxes and other deductions.

Next is the section marked with a black line at the end — Operating expenses.

These are operating expenses. This includes different articles from different companies. For example, for Intel it is:

  • Marketing (Marketing, general and administrative);
  • Research and development (Research and development);
  • Restructuring and other charges;
  • Depreciation (Things of acquisition-related intangibles).

But the count of Operating income is the operating profit.

This is an indicator of profit but differs from gross in that it also takes into account such items of expenditure as depreciation, salaries, etc.

In other words, it is a more accurate indicator of profit.

Then, another type of profit and also quite important – profit excluding taxes Income before taxes.

It shows us the profit before taxes.

When comparing these indicators, this can tell us about the effectiveness of the company and its optimization of the tax base.

Well, in the end, the most basic concepts: Net income and Earnings per share.

Net income includes all expenses, taxes. 

Earnings per share are of 2 types: basic and diluted. The difference is that the diluted (adjusted) amount takes into account the possible increase in shares outstanding. Do not be bothered, just look at the basic one.

This brings the first part of our article to the end. Read the following in chapter 2.

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