Income Statement Analysis

BUCKEYE CAPITAL INVESTORS – Information Session Agenda What is it? Accrual Accounting Line Items Fundamental Analysis and the Income Statement Game Time

BUCKEYE CAPITAL INVESTORS – Information Session What is an Income Statement The income statement summarizes the inflows and outflows of money (not necessarily cash) over an accounting period Inflows = Revenues Outflows = Expenses Inflow Outflow Outflows

BUCKEYE CAPITAL INVESTORS – Information Session Accrual Accounting Why do companies use accrual accounting? Measures the performance of a company by recognizing economic events regardless of when transactions occur As opposed to cash accounting where expenses and revenues are recorded when cash is transferred Accrual accounting uses the Matching Principle States that all expenses must be matched in the same accounting period as the revenues they help to earn

BUCKEYE CAPITAL INVESTORS – Information Session Accrual Accounting Example Month 1: You cater an event where the cost to you was $100. The customer pays you $200 for your services. Month 2: You cater an event where the cost to you is $100. The customer agrees to pay you $200 next month

BUCKEYE CAPITAL INVESTORS – Information Session Income Statement Line Items Start with the revenues and filter down through each expense to the bottom line (net income/earnings) Revenue - Cost of Goods Sold (COGS) - Operating Expenses Research and Development Selling, General, & Administrative (SG&A) Depreciation & Amortization - Other Non-Recurring Interest - Taxes = Net Income

BUCKEYE CAPITAL INVESTORS – Information Session Line Items Depreciation and Amortization Depreciation refers to the allocation of the cost of a tangible asset over its useful life Affects how you record purchasing Property, Plants, and Equipment (PP&E) E.g. A company buys a $1,000 machine with a useful life of 10 years The $1,000 dollars is allocated either evenly over the 10 years (straight line depreciation) or with varied deductions (Modified Accelerated Cost Recovery system [MACRS]) Amortization is the same principle as depreciation but for intangible assets E.g. a healthcare company spends $1,000 for a patent with a useful life of 5 years

BUCKEYE CAPITAL INVESTORS – Information Session Fundamental Analysis and the Income Statement 1.Gross Margin = Gross Profit ÷ Net Sales Revenue how much profit realized per unit sold 40250/115000=35% 2.Profit Margin Ratio = Net Income ÷ Net Sales Revenue percent of sales revenue that becomes net income 13725/115000=11.9% Profitability Ratios

BUCKEYE CAPITAL INVESTORS – Information Session Fundamental Analysis and the Income Statement Price / Earnings Ratio (PE Ratio) Net Income of $16.36 Billion 58.87/(16.36/3.21)=11.55 Profitability Ratios

BUCKEYE CAPITAL INVESTORS – Information Session GAME TIME GUESS THAT COMPANY GILEAD SCIENCES

BUCKEYE CAPITAL INVESTORS – Information Session GAME TIME GUESS THAT COMPANY GENERAL MOTORS

BUCKEYE CAPITAL INVESTORS – Information Session GAME TIME GUESS THAT COMPANY TESLA MOTORS

BUCKEYE CAPITAL INVESTORS – Information Session GAME TIME GUESS THAT COMPANY J.C. Penney