Jjolji-ma Startup School — Understanding Financial Statements and Company Valuation
Financial statements
Documents used to present information about a company that's useful to information providers for economic decision-making
(financial position, operating performance, management philosophy, etc.)
Income statement
For manufacturing businesses, the three-way method
For service businesses, the two-way method
Costs that exist only in accounting (when a large lump sum goes into equipment etc., it isn't treated as an expense until revenue is generated)
Depreciation
When factories or machines lose value over time
Amortization of intangible assets
Cash-flow statement
Financing activities = raising money (pulling in equity (capital = your own money + investor money (capital surplus)) or debt (short-term/long-term, current/non-current liabilities) to run the business)
Investing activities = spending for the business: current assets (cash, time deposits) and non-current assets (plant, land, deposits, rent, patents, etc.)
Operating activities = business sales operations: operating revenue, operating expenses (salary, marketing, benefits, telecom, shipping, entertainment...)
-> If profit occurs here, it moves as 'retained earnings' (or capital impairment) into 'financing / capital raised / your own money'
Statement of changes in equity
Tracks the flow of your own money (capital)
Order for reading financial statements
1) Growth: operating-profit margin -> net-profit margin -> asset ratios (debt and equity)
2) Transparency: operating profit, operating-profit cash flow
3) Stability: debt ratio, ROE (return on your own money), ROA (return on total assets)
Things a CEO should not skip
Startup valuation
P&L: recently, break-even is identified via variable costs
Company-value assessment: Price VS value
EV: Cap + Debt - Cash
Negotiating on Post-Money Value can leak out more of your stake. So negotiate on a Pre-Money Value basis.
PER (a high value signals a high-growth company)
share price * number of shares market cap
-------------------- = ---------
EPS * number of shares net profit
(however, you need to check the situation with operating profit and short-term net profit: if there's distortion due to extraordinary losses, you can divide by operating profit instead of market cap)
If PER is the relationship between profit and share price (based on financial statements, year-by-year check)
PBR is high when growth potential is high (based on the income statement, reflecting the equity and capital built up over time)
However, because equity doesn't include any information about the value of people, unlike manufacturing businesses, service companies where people's value matters (Google, Apple, etc.) tend to have relatively high PBR.
EV/EBITDA
Operating profit and short-term profitability come out at least earlier than PER, so using EBITDA lets you see a company's value earlier, making it useful as a leading indicator.
: For Nepa, PER was 0 but EBITDA was 7 — meaning you can recoup your money in 7 years.
