6/1/2022

Profit Mastery
Understanding the Power of
Financial Analysis

Jim Foley, Director

The U.S. Stock Market Has Not Had a Great 2022

Knox Business Intensive 2022: Profit

Mastery 1
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But What Does That Mean?

• That all companies are doing
poorly?
• That all U.S. companies are
doing great?
• That some companies are
doing great but maybe only a
few?
• Discuss your thoughts.

Indeed There Are Plenty

of Stocks Not Doing Well
• Compare to Bed Bath and
Beyond

• To Apple

Knox Business Intensive 2022: Profit

Mastery 2
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This Leads to the Question: When a Company is Losing

Its Stock Value, Can We Understand Why?
• Short answer: Yes!
• Remember: publicly traded companies must released detailed
financial information including reasons for poor performance.
• But you have to be able to read & understand financial statements
and compare performance over time.

All the Financial Data Can Be Overwhelming … So Let’s

Get to Basics
• Understanding profit and loss and the income statement
• Understanding the balance sheet
• How to take the numbers from both to compare year on year
performance, and against other companies.

Knox Business Intensive 2022: Profit

Mastery 3
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Profit and Loss:

What Has Happened Over a Period of Time
• This period
– Either a quarter, half year, full year, etc….
– Looks only at what happened during that period.

• Relationship of Revenue and expenses

– Revenue
– Cost of Good Sold (CoGS)
– Gross Profit
– Expenses
– Net Income

Revenue 1,000,000 Percent of Revenue

CoGS 300,000 30%
Gross 700,000 70%
Sample P&L Profit
Expenses
Also known as Income Advertising 20,000 2%
Statement Utilities 50,000 5%
Payroll 250,000 25%
Taxes 25,000 2.5%
Rent 120,000 12%
Total 465,000 46.5%
Expenses
Net Income 235,000 23.5%
Taxes 58,750 5.9%
Net Income 176,250 17.6%
after Taxes

Knox Business Intensive 2022: Profit

Mastery 4
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Balance Sheet:
A Picture of a Moment in Time
• A statement of key financial info on a specific date
– Assets – Long-term and current
– Liabilities – Long-term and current
– Owner Equity – Equity and Retained Earnings

• The balance sheet must ALWAYS balance

– Assets = Liabilities + Owner Equity (worksheet)
• Shows how a company manages money throughout the life of the
company.

Assets Liabilities
Current Current
• Cash 10,000 • Accounts Payable 45,000

• Accounts 170,000 • Payroll Payable 20,834

Receivable
• Inventory 50,000 Total Current 65,834

Total Current 230,000 Long Term

Long Term • Loan from owner 200,000

• Building 0 Total Long Term 200,000

• Equipment 200,000 Owner Equity

• Goodwill/IP 100,000 • Equity 1,000

Total Long Term 300,000 • Retained 263,166

Earnings
Total Owner Equity 264,166

Total Assets 530,000 Total Liabilities and 530,000

Owner Equity

Knox Business Intensive 2022: Profit

Mastery 5
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Let’s Go Online and Look at Some Financial Info

• finance.yahoo.com
• Here you can find
– stock price and history
– Income statement summary
– Balance sheet

Knox Business Intensive 2022: Profit

Mastery 6
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Balance Sheet Ratios: Systematic Way to Compare

Performance Across Years and Companies
• Current Ratio: Current Assets / Current Liabilities
– Current assets: cash, cash equivalents, inventory, accounts receivable: can
all be turned into cash within a year
– Current liabilities: loans and debt due within a year
– You want more current assets than current liabilities so a positive number is
good and the higher the better
• Quick Ratio: Cash + Accounts Receivable / Current Liabilities
– The numerator now is essentially just cash (and equivalent items) plus
accounts receivable
– Will be lower than the current ratio but if really lower, that is an issue,
especially compared with year over year

Balance Sheet Ratios: Systematic Way to Compare

Performance Across Years and Companies
• Debt / Equity Ratio: total liabilities / total equity
– Remember assets = liabilities + equity
– D/E Ratio tells you of the total assets, how much are split between what the
company owes, versus is total net ownership (stock + retained earnings)
– A ratio of 1 means for every dollar of debt, there is a dollar of equity
• A ratio of 1 or less is good.
– A ratio of 5 means $5 in debt for every $1 in equity
• A ratio above 1 may be bad as there is more debt than equity
• A negative ratio means the company has more liabilities than assets
– D/E ratios can vary considerably

Knox Business Intensive 2022: Profit

Mastery 7
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Income Statement Ratios: Systematic Way to Compare

Performance Across Years and Companies
• Gross Profit Margin: gross profit / total revenue
– This tells you the percent profit made before expenses
– A company can only be profitable if the gross margin is positive
– The gross margin needs to be high enough to also cover all expenses

• Net Income Margin: net income (pretax income) / total revenue

– A company can only be profitable if the net income margin is positive
– Startup companies may be negative for some time (Amazon lost money for
several years)
– The key is to look at the trend over 3-5 years

Cascade Office Systems

• Founder – Mr. Thomas - successful sales rep
• Success on the strength of Founder’s reputation and his ability to deliver
quality furniture at a reasonable price.
• Mr. Thomas semi-retired - turning it over to his daughter and son-in-law,
Laura and Rob.
• Perceived a growing market opportunity - custom office furniture.
• Impressive development campaign two years ago, including an expansion
of the existing building.
• Last year - aggressive promotion based on price and quality.
• It’s now the end of the current fiscal year, and they have come to you for
financial assistance. They are flushed with excitement, telling you things will
be great if they can just get the funds they need to get “over the hump.”
They brush off any talk of problems as “only temporary.”

Knox Business Intensive 2022: Profit

Mastery 8
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Cascade
Financials are
on Schoology

Cascade
Financials are
on Schoology

Knox Business Intensive 2022: Profit

Mastery 9
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Work Individually to Confirm Year 1 Ratios

Then Calculate Year 3

Now Let’s Calculate the Ratios for a Publicly Traded

Company: Apple
• Use the spreadsheet on Schoology. Be sure and save as “Apple
Ratios”
• Use Yahoo Finance to find the data
• Calculate the five ratios for the most recent three years
• What does the information tell you? Work in your teams.

Knox Business Intensive 2022: Profit

Mastery 10
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Let’s Compare Apple versus Bed Bath and Beyond

• Comparing the two companies, we can see Apple is going great,
but BBB is in trouble
• It’s the comparing of the three years that tells the story.
• Fortunately, BBB has a plan …

Summary: Profit Mastery

• Ratios from the balance sheet and income statement are a good
starting point to understand what is happening with a company
• Individuals, investors, and financial companies are also indicating
their view of a company based on its stock price
• Public companies must address these issues on a regular basis
along with an annual report
• For your team projects, use three years of these five rations and
their annual report to better understand what is happening.

Knox Business Intensive 2022: Profit

Mastery 11