A primer for understanding your money, Part 3.
This is the final article in a series to help you understand your money, in a personal and corporate sense. We discuss this now because companies release their earnings reports in October, soon after the close of the third quarter of the year (September). These reports tell you how the company is doing and can help you decide whether to continue to invest, purchase more stocks or bonds, or sell. What was important to note from last week was that at the end of each quarter (December, March, June and September), public companies who trade in the U. S. stock market, provide earnings reports. They provide these reports in the form of balance sheets, profit and loss statements, statement of cash flows, disclosures, and management’s discussion.
Our understanding of them, even at a basic level, should inform our determination whether to invest. You may even want to change your 401-K or 403-B or other retirement investment in those companies. While there are other reports to consider, the profit and loss will be our final financial statement under consideration in this series.
Profit and Loss:
The profit and loss, income statement or statement of operations is a company’s financial summary which reflects its revenues, expenses, profit or losses over a specific period such a month, quarter or one fiscal year. While there are a lot of accounting jargon and labels associated with this report such as accrual or cash basis, gross income, cost of goods sold or net income; the key is take the numbers associated with those line items and use them to compute the ratios which will explain or translate the numbers into what is taking place with the company.
What Analysts, and Now You, Consider
Analysts use financial ratios to compare companies within the same industry. One of the ratios analysts use is Profit Margin, which measures the profitability of a company or activity. This ratio tells you the profit per sale after companies deduct all their expenses. You calculate the profit margin of a company by dividing the net income after tax by the company’s net sales. So what does this really means in English? It means that if after you have performed the calculation, and the company you are analyzing shows a 40% profit margin, then for every dollar the company generated, its net profit was 40 cents.
Return on stockholder’s equity is anther important ratio. To arrive at this ratio divide net income after taxes by the weighted average equity. What will this calculation tell you? It indicates the percentage of profit that the company earned after taxes.
I could go on providing you with ratios and what they mean. Don’t let the descriptions or labels on the profit and loss overwhelm you. Instead, take that information, execute some simple math and understand what the percentages or results mean. Find all the information you need on the income statement.
What About Your Financial Outlook?
What about your personal income statement? Are you experiencing a profit or loss? Your personal income statement could be viewed through the lens of your budget. How much money are your earning each month or each year and what is your spending? Personal profit or loss in some sense can be measured through the calculation of whether or not after you receive your take home salary and pay your bills, whether money remains for saving or investment. If you are experiencing a loss, I am sure there is something you can do to move your finances into the gain category.
I have decided to add a new section to Money Monday’s called “ what’s up!” Basically, it is something very important I think you should know and may be unrelated to the main article. Today’s what’s up is about travel insurance. Booking a trip with your credit card might provide you with travel insurance if your trip is canceled, disrupted, delayed or your luggage lost. In general cards which charge an annual fee and are premium provide better travel insurance coverage. Travel insurance usually takes effect when circumstances occur that are out of your control. While your credit card travel insurance is secondary to that of the airline or hotel; if your loss is greater than their coverage, your credit card insurance may cover the difference. To know what coverage your card provides, read the benefits guide of your credit card account, and that’s what’s up!
Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC . Give2Get Rich, LLC 2021. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.