Financial Statement Analysis: When Strong Profits Hide Trouble
How analysts read financial statements: reclassification, trends, liquidity, leverage, DuPont, efficiency, cash flow, earnings quality and forecasting.
Try 3 questions
1. Why do analysts reclassify a balance sheet into operating and financing items?
- To raise the company's reported total assets
- To make the totals match tax filings
- To separate business results from funding choices
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Answer: To separate business results from funding choices
Splitting operations from financing shows how well the business itself performs, regardless of how much debt or equity funds it.
2. In a reclassified balance sheet, how is cash beyond what operations need usually treated?
- As negative debt, netted against borrowings
- As an operating asset that drives sales
- As a liability owed to the shareholders
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Answer: As negative debt, netted against borrowings
Surplus cash could repay debt at any moment, so analysts subtract it from borrowings to get net debt.
3. How is net debt usually calculated?
- Interest-bearing debt minus cash
- Short-term debt minus receivables
- Total liabilities minus total assets
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Answer: Interest-bearing debt minus cash
Net debt measures borrowings that cash on hand could not immediately repay, ignoring non-interest liabilities like supplier payables.
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