Facts in the Balance Sheet

This entry is not for the business students... Why I say so? It's probably something many business students SHOULD know.

I actually did study this whole accounting and finance thing during my Diploma for a year. Honestly, it's been years since I last take a look at it and when I started looking at it again, everything was a blur. I really can't remember crap.

So what's a balance sheet? A balance sheet is basically a summary of all the company's assets (what the company owns) and liabilities (what the company owes). A balance sheet usually gives one year worth of information.

Things you may find under Assets (What the company owns)

• Cash - Cash is the most liquid asset a company may possess. As much as you may think that having cash in the company's bank is a total waste of potential investments/income, you might just be wrong. Some companies maintain their cash reserves to earn extra cash in the money market funds, and some use them to pay outstanding loans that are soon to come.
• Accounts Receivable - Accounts receivable refers to money that is owed to the company. For example, if I purchase a washing machine from Courts at $200 and I have yet to pay for it, this sum will be recorded in the "Accounts Receivable" section of the balance sheet. Be weary of firms that has too high "Accounts Receivable" for they may not be able to return outstanding loans in time, despite the fact they have great amount of sales. Try analysing the company should this figure be too absurd.
• Investments - Just like our personal investments, some companies have investments too!
• Property and Equipment - This is the least liquid of all assets. Should the company be in a sudden need of money,  property and equipment takes a longer time to sell and liquidify (unlike investments and cash). Equipment depreciates over time and this is calculated as part of the cost of doing business each year. Depreciation is subtracted from the value of the equipment and reflected in the balance sheet.

Things you may find under Liabilities (What the company owes)

• Accounts payable - Accounts payable refers to the money that the company owes other firm/people when they place orders to purchase things. The "time lag" between recieving the bill and paying for it is called accounts payable. As much as companies with high accounts payable may seem like a worrying issue, this may also mean that the company is great with their financial management by taking a longer time to pay their bills. The longer time they take to pay their bills, the more money they have to increase revenue.
• Accrued compensation - This refers to the money that the company owes their employees. E.g. pension money which the company has to pay their employees someday.
• Income taxes payable - This refers to the taxes the company has to pay for its business.
• Dividends payable - Not all firms pay dividends, but those that do has to set aside money to pay dividends to their shareholders (like you and me!)

Equity
Equity is the difference between a company's assets and liabilities. It is what keeps the balanced sheet.... balanced!

Therefore.

Assets = Liabilities + Equity!

*it's really hard to put a balance sheet in words.. Find an example and the terms should be similar to the ones I have stated here.

Wanna be a rat?

I read this quote someone which sparked me on investing..

"Even if you win the rat race, you are still a rat."

Time to get out there and make some money.

Oh Mcdonald's has some DIVIDENDS!

While I've been eyeing on BP for close to a week or more already (honestly I'm getting really tired and bored and I'm REALLY forcing myself to stay committed), I'm also looking at other firms to safely "park" my other funds as part of constructing a diversified portfolio.

Then I came across trusty Mcdonald's. hmm. Unless a random Act of God that destroys that massive golden arches, I pretty much believe Macs has a very safe and firm business plan. I'm just a little sure that Macs will grow over the years (with emerging markets in other countries), but I'm pretty darn sure that Macdonald's has been doing pretty well.

A company like Mcdonald's will not be greatly affected my economic crisis for people turn to cheaper alternative of food and Macs happens to fall under that category (Not comparing your $3 chicken rice from Singapore.)

Although the dividend is at about 3.4% per annum, I believe it's not just about receiving high dividends but rather stable ones as well. Surely I wouldn't want to end up in a company that pays 10% dividends this year, and nothing the next few!

So Oh Mcdonald's has some dividends! yee  yah  yee  yahh  ohhhHH!

Photo courtesy of photobucket.com

What is Price/Earning Ratio?

I've seen this in MANY reports.. p/e ratio for short.. had no idea what is it, I usually just ignore it.
Laziness is my bad habit, time to take a step forward and forcing myself to believe that "ignorant is NOT bliss".

So let's have a scenario (I love scenarios...and analogies... and story-telling. People who know me well enough will know that).

There are two companies selling televisions- Firm A and Firm B. Firm A has it's stocks priced at $50 per share and Firm B has it's stocks priced at $100 per share. Does this means that Firm B would be a better buy?

Well after doing some research, I learnt that price/earning ratio will help answer that question!

So what is p/e ratio?
P/e ratio determines the stock price per share relative to the annual earnings per share. Faster-growing and more-profitable companies generally has higher p/e ratios. P/e ratio helps to compare the price of a stock to the company's profits per share or the overall market's price level to overall corporate profits.

Below is the formula to calculate p/e ratio (most sites usually calculates this already.)


SP/AE = p/e ratio

SP = Stock price per share
AE= Annual earnings per share (this can be derived from taking the total annual earnings divided by the total number of stocks issued)