Balance Sheet and Net Income Analysis

Balance Sheet Analysis:

1. Assets:
   • Current Assets (Cash, Accounts Receivable, Inventory): These should ideally be increasing over time. High levels of inventory could suggest slow-moving stock.
   • Total Assets: This is a sum of current assets and long-term investments/property.
2. Liabilities:
   • Current Liabilities (Accounts Payable, Short-Term Loans): These should be monitored to ensure they’re not increasing too rapidly.
   • Long-Term Debt: This represents the company’s debt obligations that are due in more than one year. It’s important to track how much of this is interest-bearing.
3. Equity:
   • Retained Earnings/Shareholders’ Equity: This represents the cumulative profits of the company since inception, minus its dividends. It shows whether the company has been profitable over time.

Profit and Loss Statement (Income Statement) Analysis:

1. Revenue/Gross Sales: This is typically the first line on an income statement. You want to see this increasing year-over-year, indicating growth in sales.
2. Cost of Goods Sold (COGS): This is a measure of the direct costs attributable to the production of the goods sold by a company. The COGS as a percentage of revenue can give you an idea of the company’s profit margins on its sales.
3. Gross Profit Margin: This is calculated as [(Revenue – COGS) / Revenue] x 100%. A higher gross margin indicates that each dollar of sale contributes more to covering fixed costs and profits.
4. Operating Expenses (OPEX): These are the ongoing costs for running a business, such as salaries, rent, utilities, etc. You want to see these expenses growing at a slower rate than revenue, indicating improved operational efficiency.
5. Net Income: This is the final line on an income statement and represents the company’s total earnings after all expenses have been deducted from revenues. You want to see this increasing year-over-year.
6. Earnings per Share (EPS): This measures a company’s profitability on a per-share basis, assuming common shares outstanding only. It’s calculated as Net Income / Weighted Average Shares Outstanding.

Here’s a simple example:

Balance Sheet:

Income Statement:

In this example, the company’s total assets and equity increased from Year 1 to Year 2, while liabilities remained stable. The income statement shows an increase in revenue, gross profit, and net income, indicating growth in profitability.

To perform a comprehensive analysis, you’d typically compare these figures year-over-year and also benchmark them against industry averages and competitors.