Financial Statements 101
Your Roadmap to Understanding Business Health
Before I start let me tell you that I’m no Wall Street wizard, and I’m not about to start crunching numbers for fun. But that’s the beauty of financial statements, right? They’re not just for the suits; they’re for anyone who wants to understand how money works. Whether you’re investing your hard-earned savings or just curious about how businesses tick, these statements open a window into a world that can seem pretty mysterious. It’s like learning a new language.
I got thrown into the world of financial statements during my MBA, and honestly, I kind of fell for it. Now, whenever I’m curious about a company, I geek out on their financials like it’s nobody’s business. Why? Because these statements are like a behind-the-scenes look at how a company really operates. They’re like a report card, showing you who’s acing it and who might be struggling.
Now, I’m no expert, but I picked up a few things along the way, and I thought I’d share them with you. You never know, it might spark your interest too!
We’re talking income statements, balance sheets, and cash flow statements.
Now, before we dive deeper into the nitty-gritty, let’s tackle the obvious: where do you actually find these financial statements?
The answer is EDGAR(Electronic Data Gathering, Analysis, and Retrieval). It’s the SEC’s (Securities and Exchange Commission) online database where all publicly traded companies are required to file their financial reports. Just open your browser, head over to the EDGAR website, and type in the company’s name in the search bar.
Step 1: Let’s kick things off with Uber, the company that’s changed the way we get from point A to B. Whether it’s a late-night rescue from a questionable bar or a much-needed ride to the airport, Uber has become a go-to for many of us. So let’s dive in and explore how the Uber’s business work.
Step 2: Why don’t we start by reading about their business first. If you click open the “Business” link, you will get a detailed insight into their business. Something like below:
“Uber Technologies, Inc. (“Uber,” “we,” “our,” or “us”) is a technology platform that uses a massive network, leading technology, operational excellence and product expertise to power movement from point A to point B. We develop and operate proprietary technology applications supporting a variety of offerings on our platform (“platform(s)” or “Platform(s)”).”
But what does that really mean? In simpler terms, Uber’s created a digital empire connecting drivers and riders through their app. They’ve basically become the masterminds of modern-day transportation, with their fingers in everything from rides hares to food delivery.
Okay, now I am intrigued to see the financial reports and take my understanding to another level deep.
Step 3: I will start with Statement of Operations or Income Statement.
An income statement is like a company’s profit and loss report card. Here are some key things you can look for:
Revenue: This is the total amount of money the company earned from selling its products or services. Look for trends over time — is revenue increasing, decreasing, or staying flat?
Cost of Goods Sold (COGS): These are the direct costs associated with producing the goods or services sold. A high COGS relative to revenue might indicate low profit margins.
Gross Profit: This is calculated by subtracting COGS from revenue. It shows how much money the company made after covering the direct costs of production.
Operating Expenses: These are the costs of running the business, such as salaries, rent, marketing, and research and development. Look for how these expenses change over time and compare them to revenue growth.
Operating Income: This is calculated by subtracting operating expenses from gross profit. It reflects the profitability of the core business operations.
Net Income: This is the bottom line, the company’s total profit after all expenses, including taxes and interest, have been paid. It’s a key indicator of the company’s overall financial performance.
Earnings Per Share (EPS): This is the net income divided by the number of outstanding shares. It shows how much profit each share of stock earned.
Other Income/Expenses: These are non-operating items like gains or losses from investments or asset sales.
Also please do note that the numbers are in millions. :)
Now coming back to Uber’s income statement, what are things we notice here:
1) Revenue Growth: Uber’s revenue has been growing rapidly, from $17.5 billion in 2021 to $31.9 billion in 2022 and $37.3 billion in 2023. This shows strong demand for their services.
2) Costly Operations:
- Cost of revenue: This includes payments to drivers, restaurant partners, and other direct costs.
- Operations and support: The costs of running their platform, customer support, and other operational needs.
- Sales and marketing: Expenses for advertising, promotions, and acquiring new customers.
- Research and development: Investments in new technologies and improving their services.
- Depreciation and amortization:Depreciation is the gradual decrease in the value of a tangible asset (like vehicles) over time due to wear and tear, or other factors. Amortization is similar to depreciation, but it applies to intangible assets (like patents, copyrights, or trademarks).
3) Net Loss: Despite the impressive revenue growth, Uber was not profitable during the first 2 years. This means their expenses exceeded their revenue. Although Uber reported a net loss in 2021 and 2022 as shown, but in 2023 they reported a net income (profit) of $1.887 billion.
4) EPS (earnings per share):Uber has a lot of employees and investors who hold stock options and other convertible securities. This means there’s a potential for the number of shares to increase in the future, which would dilute the earnings per share. That’s why Uber reports both basic and diluted EPS — to show investors the full range of possible outcomes.
- 2021: ($0.29) — This indicates a loss per share.
- 2022: ($4.65) — This indicates a larger loss per share compared to 2021.
- 2023: $0.87 — This indicates a profit per share, marking a significant improvement from the previous two years.
5) Other Income and Expenses: These include things like interest expenses and gains or losses from investments. They’re not directly related to Uber’s core operations but can still impact the bottom line.
Alright, I hope now you know a little better about Uber’s business model. :)
Step 4: Now we will move on to the next one that is Balance Sheets.
A balance sheet is like a snapshot of a company’s financial health at a specific point in time. It shows what the company owns (assets), what it owes (liabilities), and the difference between the two, which is the owners’ equity.
1) Assets: Uber boasts a robust cash position, with cash and cash equivalents surging from $9.2 billion in 2022 to a substantial $11.3 billion in 2023. This remarkable growth underscores the company’s strong liquidity and ability to address short-term financial obligations.
2) Liabilities:
- Current liabilities: Uber had liabilities worth $8.9 billion in 2022 and $9.4 billion in 2023.
- Long-term liabilities: Uber had long-term liabilities worth $14.8 in 2022 and $16.563 billion in 2023.
- Total liabilities: Uber had total liabilities worth $24 billion in 2022 and $26 billion in 2023.
In this case long-term liabilities dominate, which means the company is financing its operations and growth through long-term borrowing. A high level of long-term liabilities might indicate higher financial risk, though this needs to be balanced against the company’s assets and earning potential.
3) Equity:
- Shareholders’ Equity: Shareholders’ equity witnessed a notable increase from $7.3 billion in 2022 to $11.2 billion in 2023. This positive trend reflects either enhanced profitability, additional investments, or stock buybacks.
- Accumulated Deficit: The negative accumulated deficit of $30.6 billion in 2023, down from $32.8 billion in 2022, suggests that Uber has historically incurred more losses than profits. However, the shrinking deficit indicates a trajectory toward improved profitability.
To summarize, Uber holds a strong cash position, indicating good financial health. The company relies heavily on long-term borrowing to finance operations and growth. Shareholder equity has increased, suggesting improved profitability or investments. Despite historical losses, the decreasing deficit indicates a positive trend towards profitability.
Step 5: Okay, now onto the last financial statement that we are going to take a look at and that is Statements of Cashflows.
The statement of cash flows is like a company’s financial diary, tracking the flow of money in and out of the business. There are three main areas:
1) Cash Flow from Operating Activities: Positive cash flow from operations is crucial for a company’s long-term sustainability. It shows the business can generate enough cash to cover its day-to-day expenses and invest in future growth.
2) Cash Flow from Investing Activities: This section shows how the company is investing in its future. Strong cash flow here could mean they’re investing in growth, while negative cash flow might indicate they’re selling off assets to raise cash.
3) Cash Flow from Financing Activities: This section shows how the company is raising and using capital. It’s a good indicator of their financial strategy and how they’re managing their relationship with investors.
- Net income (loss) including non-controlling interests shows a significant improvement from a loss of $570 million in 2021 to a profit of $2.1 billion in 2023, which means Uber has transitioned from losing money to making a substantial profit.
- The company had negative net cash used in operating activities in 2021 (-$445 million), but this improved to positive cash flow in 2022 ($642 million) and 2023 ($3.6 billion). This means Uber’s core business operations were not generating enough cash to cover expenses in 2021, but significantly improved to generate positive cash flows in 2022 and 2023, indicating a stronger financial performance.
- Uber invested heavily in marketable securities in 2021, 2022, and 2023 possibly as a way to diversify its assets and generate additional income, which means they are taking a proactive approach to managing their finances. They’re diversifying their assets, generating additional income, and strategically managing their cash flow.
- Cash flows from financing activities include proceeds from issuance of common stock and term loan notes. This means Uber received money from selling new shares of its stock to investors. It’s a way for the company to raise capital without taking on debt. However, Uber also borrowed money through loans with a fixed term and interest rate. The presence of these items in the cash flow statement indicates that the company has been actively raising capital through both equity and debt financing, meaning Uber is focused on growth and expansion, but it also means they have a substantial amount of debt to manage.
Overall, the cash flow statement indicates an improving financial position for Uber from 2021 to 2023, with increasing positive cash flows from operations.
Yay! We’ve successfully reviewed Uber’s financial health. What do you think? Are you impressed with their business growth? Would you invest in Uber? Maybe even consider joining their team?
I’m sure this analysis answered some of your questions. If you’re reading this, you must have gone through the rest of the article, so thank you!
Please leave a comment below. I’d love to hear your thoughts. :)
