The Balance Sheet Crow River Investment Club May 13, 2003

2 References Starting and Running a Profitable Investment Club – Thomas E. O’Hara Kenneth S. Janke, Sr. The Motley Fool Investment Workbook A Balance Sheet (in this case, Lowe’s)

3 Agenda Definitions What is a balance sheet? What do the terms mean? Analysis What do I look for?

4 What is it? Reports the financial condition of a company at a specific point in time Required to report every three months Three key areas: Assets (What it owns) Liabilities (What it owes) Shareholders’ equity Assets = Liabilities + Shareholders’ Equity

5 Basic Terms - Assets Current Assets Can be turned into cash quickly (within 12 months) Examples Cash, investments Accounts Receivable (Bills due to the company) Inventories Interest payments on cash in the bank Fixed Assets Also long-term assets, property, plant, and equipment Depreciation Growth in these areas should generally not outpace sales

Assets Example - LOW Current Assets:FY02FY01 Cash and Cash Equivalents$853$799 Short Term Investments$273$54 Accounts Receivable – Net$172$166 Merchandise Inventory$3968$3611 Deferred Income Taxes$58$93 Other Current Assets$244$197 Total Current Assets$5568$4920 Property (Less Accumulated Depreciation) $10352$8653 Long-Term Investments$29$22 Other Assets$160$141 Total Assets$16109$13736

7 Basic Terms – Liabilities Current Liabilities Cash the company must pay in the next 12 months Examples  Accounts Payable (Bills the company owes)  Lease payments, short-term loans  Accrued Taxes  Accrued wages, interest, and other expense Long-term Liabilities Debt due in the years ahead vs. the current year

Liabilities Example - LOW Current Liabilities:FY02FY01 Short Term Borrowings$50$100 Current Maturities of LT Debt$29$59 Accounts Payable$1943$1715 Employee Retirement Plans$88$126 Accrued Salaries and Wages$306$221 Other Current Liabilities$1162$796 Total Current Liabilities$3578$3017 LT Debt (Excluding Current Maturities) $3736$3734 Deferred Income Taxes$478$305 Other LT Liabilities$15$6 Total Liabilities$7807$7062

So what? What’s good? Plenty of cash Non-cash current assets that are dropping Rising current liabilities (unpaid bills for which cash is on hand) It’s better if the company is holding onto cash as long as possible What’s bad? Rising Inventories Rising receivables

10 Basic Terms – Shareholders’ Equity Represents the ownership of the company Common Stock Preferred Stock Surplus Capital or Paid-in surplus Retained Earnings or Earned Surplus Prepaid Expenses or deferred charges Intangible Assets Reserves for contingencies

Shareholders’ Equity Example - LOW Shareholders’ Equity:FY02FY01 Preferred Stock - $5 Par Value, none issued Common Stock - $.50 Par Value Shares Issued and Outstanding January 31, February 1, $391$388 Capital in Excess of Par Value$2023$1803 Retained Earnings$5887$4482 Accumulated Other Comprehensive Income$1$1 Total Shareholders’ Equity$8302$6674 Total Liabilities and Shareholder’s Equity$16109$13736

12 What to Look For Working Capital – do they have liquidity to build their business? = Current Assets – Current Liabilities Current Ratio (Also Working Capital Ratio) = Current Assets/Current Liabilities Acid Test – excluded inventory and therefore focuses on short-term obligations Inventory Turnover = COGS/Average Inventory at Cost If it’s increasing – it means the company is selling faster Plant Turnover = Sales/(Property, Plant, and equipment) Book Value – more important to value investors = Stated Value of the common stock + retained earnings + surplus reserves

13 What to Look For Bond Ratio – 30-40%+ is bad Preferred Stock Ratio Common Stock Ratio Leverage Ratio of bonds to preferred stock Long-Term Debt/Equity Ratio Shows how much creditors own versus shareholders

Ratio’s and Analysis Examples Working Capital FY02: $8302FY01: $6674 Current Ratio (Also Working Capital Ratio) FY02: 2.1FY01: 1.9 Book Value FY02: 6278FY01: 4870 LT Debt/Equity Ratio FY02:.45FY01:.56

Next Month: The Cash Flow Statement