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How Stock Fundamentals are Derived from Company Financials Part 2: Income Statement

File folderIn the first installment of this series, we looked at a company’s balance sheet to learn how to derive a number of useful fundamental ratios and metrics about the company. Since balance sheets are based on a reconciliation of the company’s assets and liabilities, the fundamentals that arise from this information give us a good idea of the company’s financial health. In part 2 of this series, we will examine the income statement, and determine how additional metrics such as the PE, PEG, market capitalization, and ROE are determined, among others.

This time around we’ll use the most recent annual report from Apple (AAPL) to go by, and we’ll use GuruFocus to compare our calculations with an online source. I use GuruFocus because it provides access to the past 10 years of financial data and supports nearly all of the ratios and metrics we’re interested in.

See also: Part I of this series: Balance Sheets

Apple’s fiscal year 2012 annual report was issued on October 31, 2012 and was based on the 12 months ended September 29. I would suggest that you download a copy of it so that you can follow along. The income statement can be found on page 43, and is called the Statement of Operations in this case. There will be a few situations where we need to pull some information from the other statements, but all of these are readily available in the same report. The following screenshot shows Apple’s 3rd quarter 2012 income statement (click to enlarge).

Apple 2012 Income Statement

As mentioned above, we’ll be using GuruFocus’ numbers as a comparison to the ones we derive ourselves. A link to Apple’s fundamental data on GuruFocus can be found here.

Market Capitalization

The size of a company is often measured by what’s called its Market Capitalization, which is a number which represents what it would cost to buy all of the company’s common stock right now at its current trading price. It is calculated by multiplying the total number of common shares outstanding by the current price per share as follows: Continue reading

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