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Balance sheet provides info about the solvency, while income statement
provides info on costs, expenses and profits over a period of time.
- Net sales: total cost of all goods sold by the company
- Cost of sales: cost of raw materials, expenditure for electricity and wages for workers, also termed as cost of goods sold.
- Gross Profit: Net Sales - Cost of Sales
- SG & A expenses: executive compensation, sales commissions and staff dept outlays like rent.legal costs,office supplies, ads and PR.
- Operating Profit: Gross Profit - SG & A expenses
- Other Income: interest and dividends on securities owned, royalties on patents,profits on forex etc.
- Other Expenses: expenses such as interest on mortgage, debenture bonds, lawsuit settlements and losses on forex.
- Net income before taxes: Operating Profit + Other Income - Other Expenses
- Net income after taxes: Net income before taxes - (Net income before taxes * tax rate)
Analyzing the Income Sheet
- Pre-tax Profit Margin: Profit before taxes / Net Sales
- Return on book vale: Net Income after taxes / book value of the entire common stock
- Return on equity: Net Income after taxes / entire equity
- Sales per employee: the higher the ratio the more efficient the company is.
Evaluating Management
- Pre-tax Profit Margin
- Return on equity
- General questions:
- Age composition of the officers
- Check the correlation between pay and performance
- Stock ownership by executives provides evidence of confidence
- Majority Board of directors should be outsiders
- Auditors opinion:Routine approval or qualified endorsement.If qualified, reason for reservations.
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