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The first thing that we observe, is that sales have been increasing,
whereas the net profit has been decreasing.
So, yes, we have sales growth but this growth is not very profitable.
If you want to be more precise, you will see that sales growth has been around 17%,
whereas there's been a negative growth of 15% in the net income.
So, our margins have gone down.
So, let's just start examining the income statement by the top line revenues.
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What would be the questions that these numbers would raise?
First, why did we have this increase?
Is it that we have new customers, so new markets?
Or we have maybe new products that they're selling very well.
Is it a matter of quantity or price?
Maybe we are selling at a higher price and
this is why the total revenues have gone up.
Or maybe just that we decrease our prices and we are selling more quantity.
So the overall amount of sales is bigger.
Another question might be,
are we better at differentiating our products from the ones of our competitors?
Are we giving a better service and maybe that's why we get so many customers?
Or it's just that we are a low cost competitor and therefore,
people come to us because we are cheaper than the others.
So these are the kind of questions that after looking,
examining the numbers you can ask the managers in the company.
If we continue down the income statement, we get to the gross margin.
The gross margin is sales minus the cost of wood salt.
And what we see here is there's been a decrease in this gross margin.
So, why did that happen?
Is it that we now have higher purchase costs?
Despite the fact that we are purchasing more from our suppliers,
is it possible that they don't give us discounts?
Maybe we have changed the product mixed and now we are selling products with less
margin, or it's just that we're selling the books at a lower selling price and
therefore our margins are lower.
All of these are questions that we should ask again to the managers of the company.
The only thing that we observe here is that the margins have gone down.
If we continue down the income statement.
We get to the operating profit.
We see here that there's been a decrease in the margin of the operating profits
over sales.
Part of it is because of the, remember the gross margin already.
But also here, we observe other things.
For example, there is a one time loss that we have in year X2
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related to the sales of an asset.
Well, that is something that is not going to happen every year.
Therefore, this is something that, if we look at the future, we're going to adjust.
It's a loss that we're not going to have again.
So it's always important to ask which of the costs are recurring.
So they happen every year.
And which of them are just a one time thing.
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And so by increasing sales, if fixed costs remain the same, margins increase,
get better.
Then we can ask also about the inflation of selling,
general administrative expenses.
We actually see for the year x2 that the salaries and
utilities have increased from 30,000 to 37,000.
Also the rent that Christina is paying has increased in the second year.
So all of these are relevant things and
need to be studied in order to explain the change in the margins of the company.
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If we continue down the income statement, you'll see the profit before taxes, and
so part of it is explained by the interest cost.
And the interest cost will depend on the level of debt that we have, so
that's another question.
Something that we can see actually on the balance sheet,
the level of debt that we have.
And what is the interest that we're paying for this debt?
This is a question we can ask as well.
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Are we getting new loans that are a little bit more expensive maybe?
In this case, as you see, we continue the same as in the previous year, so
there is no cause of concern.
Finally, we go to the bottom line.
We see that overall, the margin of the company has gone down.
And so, the return on sales for example for the year x2, is going to be 3.4%.
And so the return on sales has increased from 4.7 units x1 to 3.2 in year x2.
Another way to gauge how profitable the company is, is by comparing the profits,
remember, to the investment that the shareholders have made in the company.
This is called the return in equity.
So we divide the net profit for the year, which is the amount that belongs to
the shareholders by the total owner's equity in the beginning of the year.
The return equity has decreased from almost 17% to 12%.
So, that's a substantial decrease in the return equity.
Great.
Now that we have clarity of mind that the company's profitable but that the margins
have been going down, despite the fact that the company is growing it's sales.
Let's continue with the analysis of cash.
Is the company liquid?
Are we generating liquidity?
The first thing that we see is that in year x1, there was a big decrease in cash.
In year x2, there has been a slight increase in cash of $1000.
If we start by the Cash Flow from Operations,
we see that last year there was a decrease in the Cash Flow from Operations,
the first year of operations of the company, remember.
That means that our payments, payments to suppliers,
payments of selling general administrative expenses, the rent etc.,
were actually higher than the cash we were collecting from the customers.
So this is the cash that is coming from the operations of the company.
Despite that fact that we were profitable, remember?
So last year, we were profitable and yet,
the cash flow from operations was negative.
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Now in the second year, though, we have started to collect cash.
You have positive cash flow from operations.
Why? Because now we are increasing sales,
collecting more from customers.
Remember that many of our customers pay in cash.
So that's good news.
Now in the second year, we have started to have a positive cash flow from operations.
The main reason for it, is not that we have less payments.
Actually, we have more payments as you see here.
But the reason is that we have more sales.
And as you know, most of the sales are collected in cash because they are done to
individual customers.
If we continue with the cash flow from investing,
we see that in both years it's negative.
This is normal, because this a company that is just starting the new business,
and, therefore, it has a lot of investments to make.
In this case, in furniture, and equipments.
So, in the first year, his mine was 10,000.
Remember, that was the payments to the suppliers of furniture, and,
equipments, and in the second year, it's been also negative,
because of the purchase of new furniture and equipment, but also we have to say
that part of this decrease got to do with the investment in the apple stock.
So that's something that is totally discretionary and therefore,
at any point in time, Christina cancel this investment and get the cash back.
So I wouldn't be too concerned about this minus 15,000.
Finally, we see that all of these explains the ending balance that we have, and
that we have plenty of cash to continue with our operations without any problem.
Now that we have finalized the campus booster of financial statements,
I think that you are very well equipped to really
understand the financial statements of a real big corporation.
So in the next video, we're are going to analyze the financial statements of Indie
text group, the owner of Zara.
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Marc BadiaAssistant Professor
