How to do financial statement analysis?

If you want to learn to make financial statements, you first need to learn what to read and how to read them.

A very important suggestion before doing analysis is: before looking at the financial report revenue figures, do qualitative research first.

The financial statements of listed companies often run to hundreds of pages. In fact, the core statements are three statements - "Profit and Loss Statement", "Cash Flow Statement" and "Balance Sheet".

Profit and Loss Statement (Profit Distribution Statement)", which tells us item by item where the revenue went and what is ultimately left to shareholders, so it is more accurately called "Revenue Distribution Statement" some.

The "Profit and Loss Statement" is prepared according to the principle of "accrual-based issuance system". For example, a company with sales revenue of 10 billion should receive 10 billion, but it does not mean receiving 10 billion in cash, because there will be credit and prepayment. To understand the specific relevant situation, you must read the "Cash Flow Statement".

The "Balance Sheet" is the "total accumulation" of the company's past operating performance and investment and financing results. If the company’s total assets were 10 million when it was established in early 2007, and its total assets were 10.01 billion at the end of 2016, then all the gains and losses in the past 10 years would be in the extra 10 billion, and the rest would be a cloud.

There is a logical correspondence between report items (whether they belong to the same form or not), which is called the "checking relationship". Checking the "checking relationship" is one of the important means of auditing accounts. Of course, there can be no problems with the "accounting relationship" in the statements of listed companies audited by accountants.

To fully grasp the operating status of a company, it is necessary to thoroughly understand the three reports and verify the data using the "correlation" as a clue.

But for ordinary readers, understanding the "Profit and Loss Statement" can basically clarify the status of the company. Especially for high-tech companies, assets are far less important than finance, real estate and manufacturing. "Assets are dead, people are alive" is extremely true here.

A suggestion: Before looking at the revenue figures in the financial report, do qualitative research first

There are two important concepts in the "Profit and Loss Statement", the so-called top line and bottom line. Let us first Clarify these two concepts:

Operating income (revenue or turnover) is the income due from the company selling goods or providing services under the "accrual basis" principle, regardless of whether the corresponding payment has been received. , revenue is usually at the top and is therefore called the "top line".

For traditional enterprises, revenue is not as important as net profit. After all, the purpose of running a business is to make profits. Because net income is at the bottom of the income statement, it is called the "bottom line."

Old-school investors generally hold the concept that "a company that does not make money is dangerous to society" and attaches great importance to the bottom line. Profit is the "bottom line" by which they judge a company.

New investors care more about revenue. First of all, without revenue and profit, it becomes water without a source but a tree without roots. Therefore, finding ways to expand revenue scale is the fundamental plan of the enterprise. Secondly, the scale of revenue means the "degree of indispensability of an enterprise in the national economy". Can an "enterprise that the country and the people cannot live without" be worthless?

So top line growth has become the preferred strategy for many companies, especially Internet companies.

Many people do not understand this and often make vertical and horizontal comparisons of the revenue figures displayed by companies without understanding the connotation. You know, although the revenue of Tencent and JD.com can be expressed in Arabic numerals, they are not comparable at all.

In short, when you first come into contact with an industry or a company, you should first spend some time conducting qualitative research on the revenue and nature of the company.

Two cases: tell you where the "qualitative trap" is

For companies you are not familiar with, be sure to find "Revenue Recognition" in the "Notes to Financial Statements" to see if the company is Under what conditions is revenue recognized, including excluding business tax, discounts, etc. Confirming this information can help us avoid many traps.

Give two examples and you will understand.

Case 1: Tuniu’s financial report is self-defeating

Generally, online travel companies (OTA) use paid commissions as revenue.

If the commission for a 1,000 yuan ticket is 10 yuan, the OTA will recognize 10 yuan as revenue. As Ctrip's financial report said: "we recognize revenues primarily based on commissions?earned rather than transaction value.?" This is how revenue is confirmed.

Tuniu, however, recognizes all the transaction amounts of group tours as revenue. ("Revenues from organized tours are recognized on gross basis,?which represent amounts received from?".)

In 2011, 2012, and 2013, Tuniu and group tour revenue respectively accounted for the total revenue 97.4%, 96% and 96.5%.

Tuniu.com adopts a unique revenue recognition method with the intention of packaging and listing it. Since the net losses for three consecutive fiscal years in 2011, 2012, and 2013 were all above 100 million yuan, the price-to-earnings ratio PE cannot be calculated, and the price-to-sales ratio ?PS (total market value divided by revenue) can only be used for valuation.

Qunar, which has a market capitalization of US$3 billion, is also unprofitable, with a price-to-sales ratio of about 22 times, while Ctrip, with a market value of more than US$6 billion, has a price-to-sales ratio of only more than 7 times.

Tuniu’s revenue is valued at US$320 million, which can be estimated at more than US$2 billion based on Ctrip’s market-to-sales ratio. Even if it is discounted by investors, the market value will still reach US$1 billion.

But why is Tuniu.com’s packaging self-defeating?

First of all, it distorts all financial data. Important indicators such as revenue structure, gross profit margin, and expense ratio cannot be compared with similar listed companies at all.

The second is taxes. Tuniu’s gross profit margin is less than 8%, and it is impossible to pay business tax at 5%. It is estimated that the clause quoted by Tuniu is: "When a taxpayer engages in tourism business, the balance after deducting the entire value of accommodation, transportation, meals, tickets and fees paid to other tourism enterprises shall be the turnover." To put it bluntly, Tuniu discloses revenue on a “gross basis” to investors (that is, gross revenue), while to the Chinese tax authorities, it reports revenue on the balance after deducting costs and expenses.

The financial packaging in Tuniu’s listing documents is difficult to deceive institutional investors, and the market response is not enthusiastic.

At the last moment, Tuniu found Ctrip, which invested US$220 million in a flash. With Ctrip’s endorsement, Tuniu successfully completed its IPO.

Case 2: How LeTV exaggerated its revenue

The biggest financial weakness of LeTV is revenue settlement, which is actually fully exposed in the financial report.

For example, every "Super TV" sold by LeTV is bound to a 24-month membership fee of 980 yuan. The nature of this money is "advance payment", and the corresponding amount can be recognized as income only after providing services for a period of time (a month or a quarter).

So, the super TV sold on New Year’s Day in 2014 can confirm revenue of 490 yuan by the end of the year, and it will not be fully confirmed until the end of 2015. When preparing its 2014 financial report, LeTV recognized all the 1.53 billion membership fees bound to the 1.5 million super TVs sold throughout the year as revenue, which was a rough estimate of overestimation by 1.15 billion.

Be sure to understand the nature and structure of revenue

The first step to understand a company is to understand the nature and structure of its revenue, whether it sells products or services, 2B or 2C, etc. wait.

Just like studying animals, you must first find out whether they are mammals or reptiles. Otherwise, the so-called "research" will become a joke.

Let me give you two examples to explain.

Case 3: The highest revenue among Internet companies is actually JD.com

The leader of Chinese Internet companies is BAT, among which the market value of A and T has far exceeded 400 billion US dollars, but The Internet company with the highest revenue is JD.com, which comes from JD.com’s “different” revenue structure.

There are two models on JD.com’s e-commerce platform:

The first is self-operated (JD.com is the leader of this model). In this model, JD.com’s role is that of a distributor, and its relationship with suppliers is a buying and selling relationship. What JD.com earns is the difference between purchase and sale. All risks related to the distributed goods shall be borne by JD.com, such as damage, loss, unsaleable goods, inventory depreciation, etc.

The second is the platform model (Alibaba is the leader of this model). Under this model, JD.com provides an online trading platform (Marketplace), third-party suppliers sell products directly to consumers, and JD.com earns service fees.

In the first mode, the sales of distributed products are included in the revenue; in the second mode, only the service income is included in the revenue.

For example, in the fourth quarter of 2016, JD.com’s self-operated business sales reached 72.85 billion, platform service fee income was 7.41 billion, and total revenue was 80.26 billion. During the same period, Alibaba’s revenue was 53.25 billion.

In terms of revenue, JD.com is not wrong in claiming to be China's largest e-commerce and largest retailer, but JD's transaction scale and profitability are far less than Alibaba.

This is why JD.com’s market capitalization is only one-eighth of Alibaba’s.

Case 4: LeTV’s revenue structure is unique

In addition to tending to increase revenue, some "smart" companies also like to understand the nature of revenue Packaging, because the value of different types of income in the eyes of investors is very different. The billions of sales of a real estate project and the hundreds of millions of revenue from paid software do not have the same impact on valuation.

LeTV is good at this.

When it went public, LeTV had two business lines: basic online video services and video platform value-added services.

The former includes four businesses:

1) Providing free standard definition videos through LeTV and clients;

2) Relying on the large amount of copyright content accumulated in the early days, LeTV launches copyright distribution business (customers include Youku, Tudou, Xunlei, and Pule);

3) SP business in cooperation with telecom operators (the main model is mobile phone bill sharing);

4) In 2008, the UGC model video sharing business was launched. In February 2010, there were 3.4 million registered users.

The latter includes advertising and "diversion" services (that is, diverting traffic to other websites).

LeTV obtains revenue from three sources: paying users, copyright distribution, and advertising. Although the scale is small, its financial situation is consistent with the "burning money + piracy" race to gain land, only PV is the picture, and relying solely on advertising business. There is a world of difference from other video sites.

When all video websites suffered losses and LeTV, a little-known company with a traffic ranking of more than ten, was listed on the GEM with a profit, everyone was shocked. LeTV is not cheating, but its revenue structure and performance are different.

When LeTV changed its performance from mainly 2B advertising revenue and copyright distribution revenue to 2C payment business and terminal sales, it opened up a broad space for investors to imagine, and the valuation therefore It once reached more than 140 billion.

Other important indicators used to observe companies

Revenue scale means the "degree of indispensability of the company in the national economy", but it is not the only indicator that can illustrate this problem.

E-commerce companies such as Alibaba and JD.com are accustomed to using the concept of Gross Merchandise Volume (GMV). For e-commerce merchants, the total amount of all orders on the platform during the reporting period is GMV, regardless of whether there is a return or payment.

Strictly speaking, the GMV of various e-commerce companies is not suitable for direct comparison, because the specific rules for calculating GMV are different for each company, and only they know how to calculate it.

To a certain extent, GMV is like plasticine in the hands of listed companies that can be kneaded at will. For example, the degree of strictness when excluding suspected "brushing" has a great impact on GMV. If the standards are stricter, many orders will be judged invalid and will not be included in GMV; if the standards are looser, the GMV amount will be larger.

Theoretically, listed companies have the motivation to strive for higher valuations from investors by inflating their GMV, especially for companies like JD.com that cannot produce net profits.

In short, investors must not disbelieve in GMV, nor must they fully believe it.

For example, what an insurance company discloses in its financial report is "premiums earned", which means that based on the accrual basis, the insurance company recognizes the income based on the completion progress of the insurance liability. For example, on July 1, 2016, a car insurance policy of 6,000 yuan was sold with a term of 12 months. When preparing the 2016 financial report, only 3,000 yuan of the 6,000 yuan in premium income can be recognized as income, that is, "premiums earned."

In fact, LeTV should also handle membership fees in the same way, recognizing "membership fees earned" as revenue, but in order to make the report look better, it includes all of them as revenue.

Let’s focus on this issue and let’s talk about JD.com.

Case 5: Tricks in JD.com’s self-operated GMV and self-operated revenue

JD.com announces the GMV of its self-operated business on a quarterly basis, and its value is much higher than its self-operated business revenue. One piece.

For example, in Q4 of 2016, JD.com’s self-operated GMV was as high as 115 billion, while the revenue included in the financial statements was only 72.9 billion.

"Self-operated business revenue/self-operated GMV", this value reflects the proportion of consumers' renewal amount to the order amount, and is tentatively called the "renewal rate".

As can be seen from the table below, the renewal rate of JD.com’s self-operated business is declining. The repayment rate in Q1 of 2014 was 70% and dropped to 64% in Q4 of 2016.

To put it simply, JD.com’s self-operated business GMV is one-third water. The GMV completed by third-party sellers under the platform model is even more outrageous. In addition to the "moisture" recognized by the platform, the platform's default permission for brushing orders, and the platform will not tolerate brushing orders once discovered.

When evaluating e-commerce, you should still focus on indicators such as revenue and net profit. GMV can only be used as a reference. Alibaba has begun not to announce GMV in its quarterly reports, aiming to dilute investors' attention to this indicator.