Understanding financial statements

Mining Explained

— The following is an excerpt from Mining Explained, published byThe Northern Miner.

Those long columns of numbers at the back of a company’s annual and quarterly reports may look dry, but they can reward the investor who takes the trouble to give them careful study. By learning the past earnings record and current financial health of a company, an investor can decide whether or not a stock is worth his while. The better informed the shareholder, the safer he is, especially in the case of high-risk junior companies.

Simply put, the annual and quarterly reports are the formal account of the past term’s financial activities and operations. Not only do such reports have to meet acceptable accounting standards, they must contain information required under national or provincial securities legislation and corporation laws. In addition, shareholders must receive them within a specified period of time.

Annual reports show the names of directors and details of remuneration for officers and directors, including details of their share purchase plans; a list of investments in other corporations wholly or partly owned by the company; details of long-term debts; and information on lawsuits the company may be facing.

The balance sheet illustrates the financial picture of the company at a specific date, usually the closing day of the company’s financial year. Included are the corporation’s assets, liabilities and shareholders’ equity.

On one side of the balance sheet are listed the company’s assets, which are anything that the company owns or has owing to it. They include the current assets, such as cash, short-term securities, accounts receivable, inventories and prepaid taxes, and the fixed assets, such as buildings, factories, machinery and equipment.

Note that fixed assets are sometimes referred to as “property, plant and equipment.” The normal method for valuation of these fixed assets is the cost minus whatever depreciation has accumulated by the date of the balance sheet. Accountants regard depreciation as the decline in useful value of a fixed asset due to wear and tear from use over time.

The other side of the balance sheet shows liabilities and shareholders’ equity, or the net worth of the company, which represents the shareholders’ interest.

Liabilities are what the company owes others or, more specifically, all debts that fall due in the coming year and beyond. Included here are current liabilities, such as accounts payable, income tax payable and the amount of long-term debt paid off that year, and long-term liabilities, which are debts due one year or more after the date of the financial report.

Long-term liabilities include not only long-term debts, but also deferred income taxes. This is income tax that would otherwise be payable, but which is deferred by using certain deductions provided by the government. Any tax writeoffs in the early years of investment serve to reduce what the company would otherwise owe in current taxes.

Shareholders’ equity is the total equity interest that all stockholders have in the company. On the balance sheet, liabilities are subtracted from assets, and what remains is shareholders’ equity or ownership in the company. In this way, assets always equal liabilities plus shareholders’ equity. For legal and accounting reasons, it is usually separated into three categories:

* capital stock, which are the shares representing ownership of the business, including preferred and common;

* retained earnings, which are the aftertax profits over the life of the company after all expenses and dividends have been paid out; and

* contributed surplus (sometimes called capital surplus), which is the amount raised by the sale of shares in excess of the par or market value of each share.

Neither does the balance sheet show how much revenue a company took in during the year, nor does it show the expenses incurred, how much profit was earned or loss incurred. This information is provided in the earnings statement.