In this video, we're going to take what we've been learning, and apply it to a real world company. We're going to look at some real world financial statements. As we'll see, the big difference with the real world set of financial statements, it's just that there's more lines. The underlying structure is going to be exactly the same as the way we've been talking about it, now for this company I've taken the real name off, but it's a large U.S. based multinational company, in the consumer goods industry. So it produces a lot of household products that you probably have. Now looking at the balance sheet, one thing to note is, a balance sheet is at a particular point in time. What point in time? Here they tell you it's June 30th of that year. So, not all balance sheets are December 31st. In this case, the fiscal year ends on June the 30th. Also note that as we move to the right, we're going backwards in time. Not all companies do that, sometimes as you move to the right, you go forwards in time, so this is something you want to make sure that you've checked. Also the dollar amounts here are not actually in dollars, they're in millions of dollars. So we want to double check that as well, sometimes you'll see things in millions on the financial statements, but in dollars in the footnotes. So, you don't want to confuse those. Also note that if we look at the asset side and then the liabilities plus the owners equity side, assets do equal liabilities plus shareholders equity in each year. Also note on the asset side, assets are going up. So the firm is getting bigger. What assets do they have? Well, they do have the conventional, receivables, inventory, property, plant and equipment but actually their biggest assets are intangible assets, trademarks and goodwill. Now this makes some sense given that it's a consumer products company. But remember that these intangible assets only show up on the balance sheet when the company makes an acquisition and acquires that company's products. If a company develops its own products, it doesn't get to show those as intangible assets. So, only some of its brands are actually on their balance sheet. Also note that intangibles went up this year on the balance sheet, so that means they must have made some acquisitions this year. Now the biggest asset is goodwill. This is becoming more common in many companies. So let's take a minute, and talk about what goodwill represents. Goodwill is only something that you can show on your balance sheet as a result of acquisitions. When you make an acquisition, you have to allocate the purchase price, to all of the individual assets and liabilities that you've acquired. So you have to take the receivables, and put a value on them, you have to take the inventory you acquired and put a value on them, the property plant and equipment and put a value on them, and you don't put on your books what the company that you acquired, had it on their books, you have to revalue them, what are they worth today? Do the same thing with the liabilities. You also have to assign a value to any intangible assets that you've acquired, like a patent or a brand name, or a trademark, or any of those kinds of things. When you add up all of that and compare it to the purchase price, if the purchase price is bigger, which it usually is, that's what goodwill is. So goodwill is the most intangible of all intangibles. It's what you pay that you can attribute to anything individually. So maybe that relates to synergies or kinds of assets that you can actually record on the balance sheet, like the value of the management team, or things like that. The liability side, we see short term liabilities, those are the ones due within one year and then the long term liabilities, do more than a year from now. Now a balance sheet doesn't tell you when they're due, just more than a year from now. The footnotes will usually give you more information about when that is due, which is useful information and thinking about, will the firm actually be able to have enough money to pay that off or refinance that liability? Stockholders equity. We see three big line items within the stockholders equity section. One is paid in capital, that's the amount of money that the company got when they issued shares. It's what those shares were worth when they were issued. Not necessarily what they're worth today. Then we see retained earnings. This is the amount of profits that the company has made in the past, that they have retained or not paid out as a dividend. Note that that's positive, so the company has been profitable over time. Also note that retained earnings is bigger this year than last year, so they must have made profits this year as well. Then the last big stockholders equity account is treasury stock and that's a big negative number. Treasury stock is when you buy back shares. So this company has been buying back a lot of shares, and the treasury stock account is in fact bigger this year, than it was last year, so they must have bought back shares this year as well. Now in looking at balance sheets, especially if you want compare different companies of different sizes, it's easy to get confused between the scale or the size of the company and the structure of the balance sheet. A good way to disentangle those things, is to use what's called a common size balance sheet. A common size balance sheet is not going to look at all of the numbers in terms of dollar amounts, but instead in terms of percentages. So we're going to divide everything on the balance sheet in a given year by that year's total assets. And so this is going to tell us what percentage of our assets are cash, receivables, inventory, etcetera. This is going to be useful in helping us figure out, how the structure of our assets, differ from the structure of say, a competitor. For our company, 40 percent of the assets are goodwill and 22 percent are intangibles. So again, a lot of it is in the intangible category. The assets have to sum to one on a common size balance sheet. But assets equals liabilities plus owners equity, that means liabilities plus owners equity, have to sum to one as well. So a common size balance sheet is also going to tell us, our capital structure, what percentage of our assets have been financed by short term debt, long term debt and owners equity. In this case, we see roughly 50/50, in terms of liabilities and owners equity. And it's been pretty stable over time. We've been able to compare the company to itself over time. A useful thing to also do, would be to compare all these ratios to its competitors, to see how it differs from those.
