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How Stock Fundamentals are Derived from Company Financials Part 1: Balance Sheet

File folderValue investors are very interested in the fundamentals of the companies they invest in, particularly historical data over the past 5 – 10 years. These days it’s easy to go to any of dozens of websites and pull up fundamental data such as EPS, P/E Ratios, Debt/Equity Ratios, and virtually any other metric you can think of simply by entering a ticker symbol. But where does this data ultimately come from?

The answer is that it comes from the company financials which are reported annually and quarterly in the form of a balance sheet, income statement, and cashflow statement. Why do we care? Well there’s two problems that the company financials can help us solve. First, most of the websites that provide this pre-calculated fundamental data, only do so for the current year. If we want to know what the debt/equity ratio was 8 years ago for example, we need to look at the company financials. That brings up the second problem. If you look at the financials, you won’t find the same metrics we’re used to seeing. Most of the fundamentals we’re used to seeing are actually derived from various line items on the financial statements, and to a non-accountant it’s not always immediately obvious which ones to use!

This post is the first of a three-part series, in which we’ll look at company financial statements line by line and derive the fundamentals we’re used to and love. Today we’ll look at the Balance Sheet. Continue reading

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