I will be posting a series of tutorial on how to examine a public-listed company financial health through the Financial Structure Chart.
The chart is presented by Pentaip, a local Penang startup that sorts, extracts, and displays stocks data in the simplest form to assist investors and traders on investment decisions. Here is a sample of Apple’s financial structure chart:
There are 7 columns. We will talk about each column in details. But in this article, let’s focus on the basics. We will start with the left two columns which represent the Balance Sheet, or the Financial Position in an annual report.
#1. Balance Sheet 101
The first column represents the source of fund for the company. Businesses need money to run. A public-listed company gets funding from several places, and those are categorised into three sources.
- Total Equity: represents the fund that belongs to current shareholders.
- Current Liabilities: consists of short term debt that has to be paid within 12 months, and accounts payable to supplier and contractors.
- Long Term Liabilities: generally loans that need to be paid back after 12 months.
In the second column, it consists of
- Current Assets: cash, short-term investments, inventories, accounts receivable
- Long Term Assets: goodwill, intangible assets, long-term investments, PPE (Property, Plant & Equipment)
In accounting terms, the two columns represent the Balance Sheet. We call it ‘Balance’ because the whole source of funding must be the same as the total assets. In math equation:
Total Assets = Total Liabilities + Total Equity
Total Equity = Total Assets – Total Liabilities
Similar to your personal financial position:
Total Assets = Total Liabilities + Net Worth
Net Worth = Total Assets – Total Liabilities
So the Equity of the business is the net worth of the company. Sometimes you hear people say equity, net worth, book value, shareholder’s stake, all referring to the same thing.
Now you understand the basic of balance sheets, we move on to examine the relative size of each part of the two columns.
#2. The Size of Total Equity: Bigger the better
Apple has about 27% Total Equity compared to Total Assets.
Berkshire has about 50% Total Equity.
Facebook has 86% Total Equity, which is superb because it has little debt.
Now, can you find the equity of Colgate? It is almost non-existent. In fact, you will find that it has negative equity in their annual report. Of course, it is not a good sign to put your investment.
The more significant portion of equity shows that the company runs without much debt. Smaller equity doesn’t mean the business is terrible. But during economic hardship, business without liabilities have more endurance to survive.
Stay tuned for the next article in this series to learn more about interpreting the Financial Structure Chart.
To learn more now, check out the training featuring the founder of Pentaip, Mr Yeong Ning explaining in details about the Financial Structure Chart: