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Financial Statement

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Financial statements represent the position of a company for a certain period of time. It comprises two main blocks: the Assets, where we have the cash flow, investments, receivables, inventories and several other accounts that show where the company invested its capital, or the rights and properties it has. The second block is the Labilities, where the company shows its duties, debts and obligations, including payables, short and long term debts and foreseeable expenses, showing where the resources came from and what their obligations. The Labilities also contains the company’s net assets, which can be found by subtracting the Labilities from the total Assets value.

Contrary to the company’s results, the financial statement refers to a specific date, not to a complete period or year. The statement can be generate any time, exposing the exact status of a company for that day. However, companies use to issue the statement by the end of each quarter, so it brings information on the company four times in a year, considering the assets and liabilities that the company has the specific date on which it was generated. Besides, financial statement usually bring comparisons with previous statements, in order to show how the company’s developed.

Let’s describe all accounts for both Assets and Labilities giving further details on each one of them. For such, please see below an example of a financial statement from União Química Farmacêutica Nacional S/A, in a brazilian example:

exemplo BP

Assets

All of company’s assets, properties and cash, either physical (chairs, tables, cars, properties, etc) or intellectual, such as patents and anything else is registered on the Assets column. Accounts listed on Assets have an order depending on liquidity, the more liquid appear first and the less right after. For example, the cash the company has on banks and short term investments like investments in funds comes first, as the more liquid assets in a company, since using cash is quite easy. Machinery and equipments for their turn are difficult to be converted in cash, so they come after, as it takes time to sell or lease them and use it as cash.

For liquidity matters, the assets for the Assets columns use to be separated in two different categories: current and noncurrent assets. Every single asset that can be easily converted in cash in less than one year is part of the Current Assets account. This separation is crucial – if the economy shrinks and the company faces any difficulties, current assets will certainly be used to pay debts and liabilities, suppliers and employees and keep the company operating, and the more it has available, the more you can endure the difficulties. Any other account or assets that can’t be included in the Current Assets or being converted in cash in the short term will be part of the Noncurrent Assets account, including properties, long term investment funds, intangible assets, etc.

Current Assets

Current Assets, as previously mentioned, is all that can be turned into cash in a short period of time (up to 1 year). He is also known as “asset turnover” as it makes the whole cycle of the company with cash, buying up materials or inventory that is sold to customers who become accounts receivable. When the money is received, it goes back to the cash, and the cycle begins again.

Cash equivalents

As the name suggests, these comprise a company’s resources that can be readily used without any restrictions, such as the cash itself, bank account balances, investments that can be immediately withdrawn and so on.

Cash

The cash is the amount of money available for a company by the statement’s date. It’s the more liquid asset in a company, and include all the real cash and receivables already paid and ready for being deposited in the company’s bank account. Post-dated cheques are not included as Cash, once they can be just cashed in a future date.

A high Cash in a company can indicate two things. The first is that the company probably has a competitive advantage over its competitors, and then it is generating a good income lately. Second, it probably sold an asset or a business lately, which can be interpreted as bad news, considering the company might be under pressure to sell assets and cash them out. To figure out which of these possibilities is happening, it is a matter of analyzing further the company’s statement, for a period of several years maybe.

The golden rule for finding whether a company’s Cash is healthy or not is to look at the other available assets. If the company has accumulated assets over time, and marketable securities, coupled with little or no debt, the company generates more cash than it pays and is considered a company with a good financial health, or at least will survive turbulent times. However, if the company is in desperate need of cash and it has enough debt, probably this company is in poor health.

Banks

As it suggests, the account named “banks” comprise all balances at bank accounts held by a company by the date of publishing of a statement. If a company’s expenses exceed the amount in its bank acounts, some services or loans common within banks can take place, although they are going to figure, if that’s the case, on the Labilities column instead.

Liquid investments

Some investments which are more liquid can be easily and quickly converted in cash. They inclyde some fixed income assets and funds with daily updates, and some other variable income assets with great liquidity, like blue chip shares. Updates from those investments need to be daily accounted in balance sheets, and keep up to date until their oficial publishing by each quarter or so.

Receivables

It can also appear as “notes receivable” or similar. When a company sells its products, services or goods, customers can pay for them upfront, in installments or deferred. Any receivable to be paid in 30 days or more can be registered as “accounts receivable”. When sales are up, accounts receivable also use to increase, because more customers will owe the company. Also, in order to increase sales and support their growth, some companies extend the deadlines for payments or lift the number of installments, which directly reflects on accounts receivable.

Receivables include post-dated cheques, notes receivable, promissiories and any other notes that represent a future promise of payment. Accounts receivable doesn’t give one a precise information on the company’s actual health conditions. For instance, imagine if a company has just one big client, and this key customer goes bankruptcy or decides to no longer purchase for that company. Accounts receivable and cash generation will be immediately affected. Also, accounts receivable always has a delay rate – some customers don’t pay notes by the deadlines or the noncompliance levels may soar. The safer when analyzing a company is to find what is that rate average within their sector, for example, or study deeply what has been the average noncompliance rate for receivable in that company, historically. Some companies may offer better payment terms, resulting in increased sales and consequently in accounts receivable.

Provision for unreliable payers

The provision for unreliable payers is a mitigating action for the accounts receivable. When a company sells deferred or in installments, some customers may not honor their debts, increasing the noncompliance levels. When it happens, the unpaid values trigger the provisions, and debts will be legally charged, or agreements suggested to noncompliant customers.

Provisions can’t be deduced from taxable profits, so the loss from the unpaid debts must be accounted, and then the provisions used. However, some companies use such account to estimate losses from sales, however there is no tax deductibility. Such information is a key metric for some companies, like banks, which use the provisions as a safeguard against noncompliant clients.

Inventories

Inventories comprise products which are stocked in order to supply demand and clients. Inventories include raw materials, unfinished products and finished products, those ready to be sold. In the balance sheets, the account inventories reflect the stock conditions for the day that the report is published only.

Also, there is a risk of inventories to become outdated or obsolete, or even useless. In this case, the company must find ways to get rid of that or compensate it quickly. However, some products never become obsolete. The invesntories, like net profits, should be always on the hike. That indicates the company is finding ways of increasing sales and need to keep inventories high in order to meet all the demand and orders.

Low liquidity investments

Low liquidity investments are those whose earnings should just be accounted in the next exercise or period. Basically, this account includes all noncurrent assets that can be converted in cash by the subsequential period. If their liquidity is any longer than that, then they must be classified as long term investments. The most common low liquidity investments include depository receipts, buyback transactions, BOEs and some other fixed income assets.

Other assets with no specific expiration date, like shares or gold, for instance, must be launched to the balance sheets depending on how long the company intends to keep them. These assets also can have “moving assets” as label. If the assets depreciate, positions must be adjusted in the balance sheets.

Advance payments to suppliers

Some companies pay in advance for products and services yet to be delivered. That’s a situation that compromises the cash in order to assure that goods and services will be eventually delivered. Sometimes payments in advance come with discounts. Although the goods are not yet received, they are paid, so they must figure anyway as company’s assets. This kind of deal may involve raw materials, machinery, capital goods and products in general, usually required for keeping the company running. Advances for machinery or capital goods need to be included as permanent assets though.

Advance payments give not much information about how the company is actually doing, or whether it has advantages over the competition or not.

Other receivables

The company may have other receivables to be accounted. Generally, inventories and accounts receivable are the most representative accounts. If your company has other receivables with a significant value, usually more than 10% of assets, should be explained why not be classified in other accounts and an explanation of these other receivables.

Advance payments

Include all expenses that have already been paid, but refer to the subsequential period. For instance, if the company pays an 1-year insurance policy hired in July, even when the company ends the current year, the insurance is still effective for another six months. So the company needs to include the expense for the next period as well, proportionally. Advance payments usually include insurance contracts, rents, subscriptions in general, services and other expenses, some commissions and bonuses paid in advance, union and association fees and some other payments.

Total current assets

All accounts mentioned above compose the current assets of a company. If we deduct the current assets from the current liabilities, we can figure out whether the company is able to honor its debts in the short term or not. And dividing the current assets by the current liabilities, we can find the coeficient of liquidity for the company. If the result is 1 or more, that reflects a healthy company, and the company can meet its short-term commitments. If the result is less than 1, the company may face difficulties to honor its debts in the short term.

Noncurrent assets

All of those accounts that can’t be described as current or will not be realized during the current year are considered noncurrent assets. Besides, noncurrent assets include selling rights, loans, advances or subsidiaries, directors, shareholders or participants in the profit of the company that do not constitute business as usual in the exploitation of the subject company.

The most common noncurrent assets include receivables from permanent assets sold or leased, legal deposits, which are nothing more than amounts deposited by the company for pending litigation, compulsory deposits, tax recovering, tax incentives and exemptions, etc. Loans granted to associated and controlled companies are hard to be paid back and can eventually be converted in controlling stakes. The amount correspondent to these assets needs to be constantly adjusted in the reports and balance sheets.

Permanent assets

Permanent assets, also known as noncurrent assets, comprise all investments made by the company permanently, like purchasing equipments or capital goods, acquiring other companies, their fixed assets, and other assets. Companies which don’t have a good competitiveness and need to constantly update and modernize their resources, use to create a periodic expense, and that reflects on an increasing noncurrent account. Also, equipments, furniture and properties have maintenance costs attached, and also depreciate over time. Keeping everything running may require huge investments, which destroys the company’s health, unless profits are really high. Permanent assets can be divided in three specific types: investments, fixed assets and long term.

Investiments

These investments comprise shares and stake at other companies or groups, or rights of any nature non related to the current assets, and not related to the company’s core business. These investments have two types: permanent stakes at other companies and noncurrent rights.

1. Stakes at other companies: that regards any investments made by the company in other companies or groups. If the company buys shares at the stock exchange for future purposes, that must appear on the current assets, and not on the on the permanente asset. There can be several reasons for a company to buy equity or stakes of other companies – diversifying businesses, like a bank acquiring shares of steelmakers or IT companies; downstream or upstream moves, in order to optimize processes and waive increasing input or distribution costs, like a alcohol producer acquiring cane plantations; supply of raw material, when a company invests in greater supply company; Other reasons, such as a factory to create shops to sell their products

Participation in other companies may have the following characteristics: 1 Investments in subsidiaries, where the company has a percentage of ownership in other companies without controlling it, such as a 10% stake. 2 Other investments when investing in other companies occurs without coalition or control.

2. Noncurrent rights: are those not classified as current assets or long-term assets. As an example, the goods are not intended for sale and which are also not used in the maintenance of the company (works of art, for example), and land and building activity that the company will not use in their activities, while maintaining a own reasons for expansion, for example.

Fixed assets

Fixed assets are properties and goods necessary to keep the businesses running. They are the tangible assets, not saleable and being used to keep operations, with a life time larger than one year and a relevant value. Those assets can vary depending on the company. For example, an airline has its planes as tangible assets, the most important of them in fact. For a paper and pulp group, tangible assets may include forests and the plant itself.

An asset can be classified as inventory or asset, depending on your branch. For example, at a dealership, the cars manufactured are not active, but stock. Items that are part of the tangible assets are evaluated not only by their acquisition prices, but also by the costs to start them up and keep them running. Also, they have a natural depreciation, an ammortization and an exhausting date, according to their lifetime. The most common tangible assets are:

Real estate and properties – any realty, property or piece of land owned by the company and destinated to its activities. If the company intends to sell them, they won’t be related as tangible assets. Their value include the purchasing prices plus the costs of licensing, registering and commisions to real estate agents.

Equipments and machinery:  any machine or equipment used on production, also bookkept by its acquiring value more freight and transport expenses, commissioning, maintenance, etc.

IT equipments and others: include any computer, peripherals, servers, and all components for their maintenance.

Vehicles: all vehicles used for transport, like trucks, and also personal and commercial vehicles that serve the employees.

Furniture and office improvements: basic furniture, chairs, tables, cabinets, air conditioning, etc.

Construction in progress: any ongoing construction work or renovation, including costs with pieces of land, projects and design, materials, taxes and any other related cost. However, if the realty or building is being constructed to be sold in the near future, it shouldn’t be included in this account.

Others: depending on the company’s sector and core business, other tangible assets may appear, like forests, animals, and others.

Depreciation, ammortization and exhaustion

Depreciation, ammortization and exhaustion are reducers on tangible assets. Those goods are subject to deterioration and wastage, or a natural consuming process. Each kind of equipment or capital good, for example has a particular depreciation rate, according to the local laws:

Tangible asset

Depreciation rate

Estimated lifetime

Buildings

4%

25 years

Equipments and machinery

10%

10 years

Vehicles

20%

5 years

Furniture and acessories

10%

10 years

Installations in general

10%

10 years

Tools and appliances

20%

5 years

Computers

20%

5 years

Moreover, there are some specific proceedings for doing a depreciation. When a company chooses one of them, it must keep it until the end of the assets’ lifetime, or in case of change, should explain in a note why this change. The main depreciation methods are:

Straight-line depreciation: the most often used method, in which the company estimates a life cycle for the asset and its salvage value by the end of that (scrap value). For a product with a 10 year lifecycle, depreciation rates reach 10% per year.

Declining balance method (Matheson method): a constant rate of depreciation is used to reduce the equipment’s value. Using this method, depreciation is larger in the first useful years.

Cole’s or sum-of-year-digits: the rates considered are a fraction based on the sum of the digits for the equipment’s lifetime. For instance, if a truck has  a life cycle of 5 years, the base will be 15 ( 1 + 2 + 3 + 4 + 5). After that, you need to divide the rest of useful years (5/15, 4/15, 3/15, 2/15, 1/15). The sum of the 5 years overall must be equal to 100%.

Units-of-production depreciation: this method as the name suggests considers the nominal capacity of an equipment and its estimated output for its total lifetime. Its value will be a division of the number of units produced in a given period by the total number of units to be produced throughout their estimated useful lives.

In summary, we can say that the depreciation corresponds to the loss of physical objects resulting from your use or natural wastage, losing their utility. The amortization corresponds to the loss of the value of capital invested in the acquisition of rights of industrial or commercial property. Already, exhaustion refers to impairment due to operation being these natural resources, such as a deposit of mineral or an oil.

Many times, companies make an analysis of the items on tangible assets accounts to find the actual value of their assets and properties. That can eventually produces an increasing on tangible assets account, which reflects into the company’s net assets, in an account of equity adjustment. This evaluations is often necessary because the values ​​may be very outdated. Other times, companies do this evaluations to superficially improve their balance sheets by artificially improving your net worth.

Intangible assets

The part of the permanent assets that include rights over intangible properties intended for maintenance company. These assets can be patents and brands, intellectual property, franchises, etc.

Deferred

Deferred assets comprise those properties and assets which will contribute for results in more than one period or exercise that are now enjoyed the benefits resulting from them, should be recorded capital losses applied when the abandoned projects or activities that are intended, or proven that these activities may not produce enough results to amortize them.

Here are some examples of deferred assets: construction works or projects underway, research and development, systems and platforms, etc. In this case, expenses were already paid, and will contribute to the composition of future results. Deferred assets have a very low liquidity and rarely can be redirect to the cash flow. There are two basic types of deferred assets:

Pre-operational expenses: expenses in new projects, especially in new companies, in which the costs consist in a lind of preparation for the future. The expansion of a building should not be classified as deferred as it does is the construction and should be classified as permanet assets.

Other deferred assets: any other expenses, like R&D costs or developing new systems. The most important is that this kind of asset must be looking forward to be realized.

Total assets

From cash, cash equivalents and permanent assets, we can find the total assets of acompany. The Assets, or total assets, is equal to the Liabilities plus the Net Assets. The Assets reflects how a company uses its resources and assets. For such, we can use a formula – finding a coeficient from dividing the company’s profits by the total assets.


Liabilities

The Labilities are the second column of a balance sheet, and represent all resources spent or consumed by a company, either from third parties (debts) or from partners and shareholders (own capital), or resources from capital investments or profits made by the company. The liabilities are divided in four different parts: current liabilities, long term liabilities, deferred liabilities and owner’s equity (net assets).

Current liabilities

Current liabilities comprise those debts and obligations due to the next fiscal period or exercise, in other words, are debts and obligations that the company has to pay and that will mature within up to one year. The main accounts that compose the current liabilities are:

Suppliers

This account reflect purchases made for future payment or in installments by the company. They can include raw materials, components used at the output and other production-related materials. When a company puts an order for buying goods in general, the suppliers issues an invoice. If this invoice represent a period of less than one year, then the products bought are write down in the suppliers account. These suppliers may be domestic or foreign. Cash advances to suppliers for guaranteeing a delivering or supply must be included in the current assets instead.

Salaries and labor duties

This accounts, as the name says, all salaries paid to employees must be added, as well as taxes over the payroll and other labor duties, like the INSS and the FGTS in Brazil. If salaries are paid by the beginning of each month, the expense needs to be bookkept during the same month. Labor duties and taxes, instead, have to be paid in the subsequential month. Other expenses not paid by the beginning of each month, such as the 13th salary (only by the end of the month) have to be forecasted. If the company does not accrue these expenses during the months of the year, will have a very big expense at the end of the year, impacting the values ​​of liabilities and consequently the balance sheet, affecting debt and the company’s liquidity.

Taxation

This account includes all payable taxes. Among them, the ICMS – Tax on Goods and Services, which focuses on the company’s sales; IPI – Tax over manufactured products, based on sales of the company that are subject to this tax; ISS - Tax over service providers, incident on the revenue of servisse; PIS – Social Integration Program (a social development contribution calculated over the company’s revenues), levied on the turnover of the company, for the formation of a fund for workers; IRRF – Withholding income tax, incident on profit; COFINS – Contribution to Social Security Financing (a health insurance contribution), levied on gross revenues and established to fund social security.

Financial institutions

This account brings all loans obtained by a company from banks. Loans can be taken in local and foreign currencies. A company usually disclose all info on its loans and credit lines – interest rates, deadlines, the lender, reasons for taking the credit or debt (cash flow, expansions, advance payments, etc), all further information that proves to be relevant for shareholders and the market.

If loans repayment or timetable last more than one year, they come into the long term liabilities account. As pay dates come, installments due to the next 12 months are transferred to the current liabilities account, and listed together with other current debts and obligations taken by the company for the short term.

This is one of the most important accounts in a financial statement. Borrowing money in the short term implies the company needs to repay them also in the short term, and that can be made by taking new loans and credit lines, extending dates of repayment and rolling debts over. The problem of using the “rollover” mechanism is the risk of enlarging the current liabilities at higher interest rates, until getting into solvency issues. Opposingly, keep too much in long term loans and credit usually reduces the availability of credit in the short term. Banks hardly lend to companies which accumulate excessively high long term obligations, leaving the cash of the company down for a while.

Short term debentures

Many times a company, in order to lift capital, decides to issue debentures. A debenture is nothing more than a note issued by a company to raise long term capital, paying interests and sometimes allowing those people who bought the notes to convert them into some amount of company’s shares. Even though debentures are basically long term notes, as expiry dates become closer than a year or less, their value is transferred to the current liabilities account.

Others

Any other duty or liability not included in the previos accounts and not relevant in terms of value (representing less than 10% of current liabilities) can be included in an account named “other”.

Total current liabilities

The total current liabilities include all accounts mentioned above and must include all of the duties and obligations of a company, including, for example, taxes payable, accounts payable and short-term debt. Analyze the total current liabilities is important because it is this account that we know the company’s solvency and know more if it has many debts to pay in the short term.

Long term liabilities

All debts and obligations which are long term payable come in this account, or those whose payment is scheduled for a date 1 year ahead or more. Companies with no debts or few liabilities have a competitive advantage in the long term. Sometimes getting a credit line or loan can help the company financing projects and passing through hard times. However, those with a heavy long term liabilities account, especially if they are payable for the same period, might be fightening shareholders and investors. Besides, if a company borrow too much money, even if they are long term debts, this can be a sign of trouble, and the company may have problems with its cash flow generation and, eventually, might be going bankruptcy.

Financing

Long term financing or credit line are taken by a company from a bank or entity, in order to finance projects and capital goods. Many companies borrow from BNDES – National Bank for Economic and Social Development - resources to finance machinery and equipments,expansions, and other projects and investments. There are hundreds of diferente lines offered by BNDES, like the Finame for instance, which is a specific line for financing expansions.

Long term debentures

They have the same characteristics of short term debentures, but their expiration dates are 1 year distant or more. As expiry dates come closer than 1 year, debentures may figure within the current liabilities account.

Taxes

Taxes here are “deferred”, or represent those taxes which have been forecasted but still not paid, or are payable for future exercises. That may include any kind of tax – INSS, ISS, IRRF, etc. This account says a little about a company’s situation and competitiveness. However, some companies have really huge amounts of deferred taxes, and as they must be paying then eventually, that is to harm the cash position at certain point, bringing risks to the company.

Others

Other long-term obligations may appear in the balance sheet where these obligations do not enter into the above categories, such as advances from shareholders for a future capital increase.

Outcome results and revenues

Revenues to come in the next periods and exercises may appear, deducted from costs and expenses. These results represent an advance receipt, without an advance and without liabilities because they are not subject to refund. There are a handful of examples, but we can quote advanced rents or commissions for a financial institution, tied to a loan or credit line. Costs and expenses over these advances must be taken in account, to give a clear overview about the amount of revenues to be expected  for future exercises.

Equity

The owners’ equity shows the stakes of the company that belong to each one of the partners and stakeholders. That comes in the liabilities column as it is actually a company’s duty with stakeholders and shareholders. The owners’ equity include any capital initially invested by stakeholders and partners to keep the company running plus reinvested earnings in the company for it to continue working. The owners’ equity is formed by some accounts:

Social Capital

A company’s social capital is expressed in shares, for anonymous societies, or in quotas, for limited companies and ventures. Thus, shareholders and partners underwrite to a certain number of shares or quotas e make capital injections according to the stake they took. By undersigning, those investors commit to participate in the society by acquring a certain number of shares or quotas.

As a company conducts its business during his lifetime, there may be an increase in capital by selling new shares to the public in order to raise money, or a reduction of capital when the company goes through a spin-off, for example. Every increase or reduction of capital occurs through changes in the bylaws or articles.

Unpaid equity participation

This account brings any capital from shareholders who got their stake but are yet to pay for the correspondent equity – this is basically a deducting account from the amount of the Owner’s Equity overall.

Equity reserves

Equity reserves act like a reinforcement for the social capital. They can be sourced from (1) premium on issue of shares, being the difference between the book value of shares and the price paid by shareholders; (2) sale of beneficiary interests, which are nothing more than marketable securities, but without foreign capital and nominal value, which entitle their holders the right to any claim against the company; (3) sale of warrants that may be issued by companies within the authorized capital limit in the statute, giving their holders the right to subscribe for shares of the capital stock; (4) premiums paid for issued debentures, which are ‘extras’ paid by debenturists from the nominal value of the debenture; (5) donations, either capital or goods, which can be accounted by their market values; (6) public subventions, a kind of help offered to the government, such as tax incentives; (7) indexation of capital and which can only be done while not capitalized where this indexation will be used to increase capital.

Profit reserves

As the name suggests, it is a reserved account for profits of the company. Some types include: (1) legal reserve fund, from the profits made in a period, where 5% are separated to create this fund, which can’t be larger than 20% of the company’s share capital. This reserve can be used only for losses compensation and capital increase; (2) bylaw reserves, where company’s bylaw may establish reserves, since its purpose is indicated, for example, expansion plans or payment of dividends, and establish the percentage of profit that will go to its constitution and set a limit to such reserves; (3) provisional that are made in order to compensate for the decrease in future years resulting from loss of profit deemed probable and whose value can be estimated; (4) unrealized  reserves, where its main purpose is to prevent the distribution of dividends relating to unrealized profits financially.

Equity adjustments and assessment reserves

Assessment reserves are formed as a consequence of adjustments to be made in the value of goods present in the permanent assets.  In other words, that include any adjustment made on assets after being evaluated by specialists, conducted every time a company judges some of its assets can be undervalued. Among the reasons to reassess the value of property, is no restatement of the asset or the use of indices that do not reflect the inflation, or when there is an appreciation of a good that was superior to book value, or an asset that is well maintained and after many years of depreciation, the residual value is zero.

Accumulated profits or losses

Accumulated profits or losses are the balance of profits or losses after making reserves, paying dividends and participations on profits. The company’s net profits can be distributed on dividends or used to support the business’ growth. When it happens, the amount is writen as accumulated profit. The figure is considered one of the more relevant in a statement. If a company is not producing accumulated profits, that means the owner’s equity is not growing at all. To find whether a company has competitive advantages in the long term or not, we can definitely check the accumulated profits.

Accumulated profits don’t come from revenues all the time. Sometimes they may come from acquisitions of other companies. If profits are not distributed as dividends, they shall be accounted as accumulated profits, and the more profits a company can make, the faster will be this account growing, increasing the growth rate of future income

There is an indicator that measures results over equity, which shows how effective the managers are in multiplying the shareholders’ capital. If we sum the net profits with the net equity, we can find it. Companies with a return on equity above average means they are effectively using the profit that was retained, in addition to having a competitive advantage over other companies.

Summary

Financial statement can be summarized, as the model below shows (brazilian example):

Final_Balanço_Patrimonial

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