How To See Company Value From Financial Statements

The assets of an enterprise do not represent the value of an enterprise. The assets of an enterprise consist of two parts: assets belonging to shareholders (represented in the balance sheet as shareholders' equity) and assets borrowed from creditors (expressed as liabilities on the balance sheet).

The value of an enterprise must not be measured in terms of total assets, because assets borrowed from creditors are to be repaid.

If the total assets are more and the business value is bigger, the company can only achieve more debt by borrowing more.

Excluding liabilities, can companies use net assets?

How much is it to measure? It needs to examine the quality of company assets.

In fact, the quality of company assets is different. Some assets are of high quality, such as cash, bank deposits, short-term investments, and so on. The quality of some assets is worse, such as accounts receivable, long-term investments, fixed assets and so on. Some assets are of low quality, and are called "junk assets", such as intangible assets, long-term prepaid expenses, deferred taxes, etc.

Just because the quality of assets is high or low, net assets can not represent the value of a company.

In fact, the value of a company depends on the discount of its net cash flow in the future. Only when the capital return of a company exceeds the cost of capital will it create value.

The popular analysis of this sentence is to achieve the value of the company. Two points are very important. First, the company must have profits; secondly, profits should be pformed into cash into enterprises.

In the specific form, the increase of the company's value is mostly reflected in the increase of net assets and net profit.

As we mentioned above, we can not use the net assets to measure the value of the company. Here we also say that the increase of the company's value is mostly reflected in the increase of net assets and net profit. Is the contradiction between the two? The answer is negative. The reason is that the relationship between net assets and net profit and the value of the company is the relationship between the phenomenon and the essence. The phenomenon can not represent the essence, but the essence can explain the phenomenon.

The maximization of shareholders' equity and the maximization of enterprise value are a controversial topic in academic circles.

We do not analyze the difference and relationship between the two. In the practice of corporate finance, it is easier to understand and operate the goal of maximizing shareholder rights.

To a certain extent, the profits of a company, the value of a company and the equity (net assets) of shareholders are positively correlated.

First, the source of profit: (1) main business income, 2) other business profits, 3 investment income, 4 subsidy income, and 5% extra business income.

Observing the proportion of the profit composition of enterprises, we can see whether the business condition of the enterprises is normal. Under normal circumstances, the net profit should come mainly from the main business income.

Second, the factors leading to a decrease in profits are: 1. Main business cost, second main business tax and additional expenses, 3 business expenses, 4 management expenses, 5 financial expenses, 6 business expenses, and income tax.

List these items to show you that the cost of frugality can be achieved in those areas.

The occurrence of "main business cost" is reflected in the production link. The occurrence of "business expenses" is reflected in the sales link. The occurrence of "management expenses" is reflected in the management link. The occurrence of "financial expenses" is reflected in the fund-raising link. "Extra business expenses" is an exceptional loss.

And "income tax" can be evaded by tax planning.

Third, the standard of sales income recognition: (1) enterprises have pferred the main risks and rewards to the buyers; second, enterprises do not retain the right to continue to be linked to ownership, nor to control the sold goods; third, the economic benefits related to pactions can flow into enterprises; and the related income and cost can be reliably measured.

The standard of sales confirmation is to tell you that you must not only sign the sales contract when you confirm your income.

Fourth, the increase in "surplus reserves" and "undistributed profits" in the balance sheet depends on the company's "distributable profit": "distributive profit" depends mainly on the company's "net profit".

The relationship between balance sheet and profit statement is that the net profit in the profit statement is eventually merged into the "surplus" and "undistributed profit" in the balance sheet.

Of course, there are also situations of distributing cash dividends and rights issues.

Fifth, the most direct way to achieve the company value and maximize shareholder interest is to increase the profit of the company.

Development creates a source of profit, reducing the factors leading to a decrease in profits.

Improving financial statements is not to induce people to do false accounts and gloss over statements.

From the angle of enterprise value realization, we talk about the improvement of financial statements. The purpose is to guide people to correctly understand the similarities and differences between accounting profit and company value increment, net assets and company value, and set up the idea of managing for the growth of company value.

The pursuit of accounting profits should not be the purpose of managers' management.

Common sense knows that if the quality of company assets is poor, accounting profit is just a smokescreen of self deception.

In accounting statements, the realization of the value of enterprises is reflected in the increase or decrease of net assets. The consideration of the change of net assets should focus on two aspects: quantity and quality: "quantity" is reflected in the level of net profit, and "quality" is reflected in the level of cash flow and the quality of assets.

Accounting profit can reflect the increment of net assets. If the company's cash flow is normal, the proportion of cash flow from operating activities to total cash flow is appropriate. Accounts receivable are in good condition and the quality of other assets is relatively high. At this time, the company's financial statements can be considered excellent.

If the company's statements do not reach this level, the managers of the company should try to find the gaps and find out the reasons for the poor level of reporting.

The specific operation can be embodied in the following three points:

A, comparison of financial statements in different periods.

To do this work is to observe the growth of enterprises, and the poor financial statements are temporary or long-lasting.

If it is a temporary phenomenon, it can be analyzed whether the market is weak or the competitiveness of products is declining. If it is a long-term phenomenon, it is necessary to consider whether the product is already showing the trend of sunset.

All of these should be analyzed according to the situation.

B and improving the financial statements of enterprises mainly focus on improving the profit statement and how to increase company profits.

The profit statement is the key to the three statements. It is in the middle position, "balance sheet - profit statement - cash flow statement".

The profit in the profit statement directly affects the increase or decrease of shareholders' rights and interests in the balance sheet. In fact, the number of profits can be linked to the cash flow generated by business activities in the cash flow statement.

As long as the company's profits increase, under normal circumstances, shareholders' equity in the balance sheet will also increase, and the net cash flow in the cash flow statement will also increase.

But there is a premise for the synergistic change between the three, that is, when the sales are realized, the acceptance rate should be as high as possible.

C, two ways to increase company profits: open source and throttling.

The focus of the open source is to achieve product differentiation. The emphasis is on reducing the production cost and the management cost of the company.

The improvement of financial statements is not just the responsibility of accountants; on the contrary, it is the responsibility of senior managers of the company.

Only by strengthening management, improving technology and reducing costs can executives improve their accounting statements correctly.