Interpreting Financial Information Securities and Investments

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The Annual Report COMPONENTS OF THE ANNUAL REPORT: Letter to shareholdersFinancial highlightsCharts and graphsFinancial statementsAdditional notesCompany information 3Copyright © Texas Education Agency, All rights reserved.

Financial Statement -The Balance Sheet Provides information about: –Assets (Property)-current (cash) and long-term (land, buildings) –Liabilities (Loans)-current (accounts payable), long- term (notes payable) –Net worth or stockholder’s equity 4 Copyright © Texas Education Agency, All rights reserved.

Financial Statement -The Income Statement Provides information about: –Revenue-income from sales –Expenses-operating expenses such as salaries, rent, and utilities –Net income/Net loss- revenue minus expenses 5Copyright © Texas Education Agency, All rights reserved.

Financial Statement -The Cash Flow Statement Look for: –A positive number in cash flow from operations –Negative numbers in the investment section are not necessarily bad because it may mean the company has money to invest. –Negative numbers in the financing section may not be a red flag either because the company could be paying out dividends or purchasing stock back from investors. 6Copyright © Texas Education Agency, All rights reserved.

What to Look for In Financial Statements Has balance sheet improved over the years? Is there net income or net loss? Is cash flow negative or positive? Has cash flow from operations been increasing? Are there risk factors or any legal actions? Have gross margins been increasing? Calculate various ratios from data in annual reports. 7Copyright © Texas Education Agency, All rights reserved.

What is a Prospectus? Information provided by a corporation about an investment offering For mutual funds, look for: –Management fees –Performance –Risks –Price per share 8Copyright © Texas Education Agency, All rights reserved.

Fundamental Analysis Uses data from financial statements to value stocks and bonds Uses the credit rating of a bond issuer Looks at interest rates and economic factors Warren Buffett-firm believer in fundamental analysis 9Copyright © Texas Education Agency, All rights reserved.

Technical Analysis Relies on historical performance of a stock in predicting future success Also relies on market trends Supply and demand- important factors 10Copyright © Texas Education Agency, All rights reserved.

Financial Ratios-Liquidity 11Copyright © Texas Education Agency, All rights reserved.

Financial Ratios-Profitability 12Copyright © Texas Education Agency, All rights reserved.

Financial Ratios-Debt 13Copyright © Texas Education Agency, All rights reserved.

Financial Ratios-Operating/Cash Flow 14 Copyright © Texas Education Agency, All rights reserved.

Financial Ratios-Value of Investment 15Copyright © Texas Education Agency, All rights reserved.

Financial Ratios-Value of Investment (continued) 16Copyright © Texas Education Agency, All rights reserved.

Formal Assessments Annual Report Analysis Assignment #1 - Select two companies and conduct Internet research to locate their annual reports. Create a table or diagram comparing at least 5 different ratios for the companies using the Balance Sheet, Income Statement, and/or Cash Flow Statements. Make a recommendation on whether or not investing in stock in these companies would be a profitable idea. Mutual Fund Venn Diagram Assignment #2 – Create a diagram comparing and contrasting 3 different mutual funds by searching online for ‘mutual fund prospectuses’. The outer circles will contain the name of the fund and the price per share of the fund. Include other pertinent information: a statement summarizing past performance of the fund, risks of the fund, management fees, and the investing strategy of the fund. These may be included in the outer circles as well, but any information that is common to all three funds should be placed in the overlapping parts of the circles in the Venn diagram. 17 Copyright © Texas Education Agency, All rights reserved.

Formal Assessments (continued) Company SWOT Analysis Assignment #3 – Following the example of the SWOT analysis done as a class, select a company (the teacher can randomly place company names under each chair in the room and the students can see which company name is under their chair) for which to conduct a SWOT as an alternative investment strategy. This analysis may be done on a computer using any of the available templates online or manually on posterboard or flipchart paper. Include an investment recommendation based on the SWOT analysis. 18Copyright © Texas Education Agency, All rights reserved.