I am a huge fan of "give a man a fish, feed him for a day; teach a man to fish, feed him for life". So that being said, i want to expand on my previous post about ETFs and Mutuals. This one is how to take a basic look at a company's financials and what to look at. I am targeting this at people who have zero understanding of accounting or finance. What I am going to show you will equate to how you look at things in your own life. That being cash and debt. I am going to reference the website Marketwatch.com because it doesnt have a paywall. feel free to use any site you want to find this info. Next, I am going to compare two companies in the same sector. This is important. Comparing the financials of a manufacturing company and a bank dont really work well on the surface. They tend to use different metrics. I am going to show you just three different financial metrics. EBITDA, Long-term Debt and Free cash flow. EBITDA stands for Earnings before Interest, Taxes, Depreciation and Amortization. EBITDA is standardized so it makes a pretty consistent metric. So think of EBITDA as profit, Long-term Debt as just that, debt owed to bond holders etc, and Free Cash flow is again just that. Free cash after all debt payments, bills, costs etc have been paid.
Lets look at two big pharma companies. JNJ (Johnson and Johnson) and PFE (Pfizer).
On Marketwatch, search for PFE. Once on the overview, look for the task bar and choose "Financials". You will see three reports (Income Statement, Balance Sheet and Cash Flow Statement). We are looking for one item on each tab.
On the income statement, scroll down to the bottom and look for the most recent EBITDA. Note that this also gives you the last 5 years of info, which is great for looking at trends.
PFE reported 2019 EBITDA of 20.31 Billion dollars
Click to the balance sheet and about halfway down find "long-term debt". it is in the Liabilities and Shareholder Equity section. PFE has 37 billion in long term debt.
Finally go to the cash flow statement and all the way at the bottom find the "Free Cash Flow". PFE has 10.41 billion in free cash flows.
Now do the same for JNJ and we get 28.56 billion in EBITDA, 27.21 billion in debt and 19.92 billion in free cash.
So comparing the two, JNJ has 7 billion more in earnings (25%) 10 billion less in debt and nearly 10 billion more free cash a year. A common ratio is EBITDA to Long term debt. PFE has a debt ratio of 1.84 and JNJ has a ratio of 0.95.
Forgetting all other variables (products in pipeline, JNJ's diversity into products like soaps, shampoo etc), from a financial health perspective JNJ appears to have a stronger financial picture. Im not saying PFE's is bad, but when you are looking at companies to invest in and comparing two similar companies, this is a good thing to take a look at. These are the types of things that determine which companies survive things like Coronachan and which companies dont.
Good luck.