UR Entrepreneurs February Newsletter: Things to Know for Your Next Finance Interview

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  • 7/29/2019 UR Entrepreneurs February Newsletter: Things to Know for Your Next Finance Interview

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    A lot of people may wonder what it takes to do

    well in a finance interview. What kind of things do we

    have to know anyways? One of the fundamental things

    that each finance or non-finance majors are expected to

    know is how to analyze financial statements. These

    three statements allow investors to extrapolate and

    judge the financial standing of the company that they

    may be interested in investing with. Each of thesefinancial statements are very detailed, and for the first

    edition of our monthly newsletter, I will walk you

    through the analysis of the Balance Sheet.

    You may all be wondering, what is a balance

    sheet? It is a financial statement that provides a

    snapshot of a companys financial health at a specified

    date! I can guarantee you that if you take a snapshot of

    yourself today and another one sixty years from now,

    you will look very different. That is why if you were to

    compare the balance sheet of different companies, you

    need to select balance sheets that come from the same

    time frame; otherwise your conclusions will not berelevant.

    So what goes into a balance sheet? Balance

    sheets in general outline how much assets, liabilities,

    and shareholder equity a company has. Dont be scared

    and discouraged by the technical terms. Assets in

    general are what the company owns. Think about

    yourself. Yours assets will be how much money you

    have, the number of shoes you own, or your jewelry

    collection. For businesses, its the same way. Assets

    for companies normally take the form of cash,

    property, inventory, etc. Liabilities are what the

    Things to Know for Your Next Finance Interview

    -Oranich Aimcharoen 14

    company owes. For you, it would the loan that you

    have to pay back mom and dad for your college

    education. Companies do the same thing. Some of

    them choose to borrow and take out loans from banks.

    Companies also purchase inventories (the stuff that

    goes into production) from suppliers so they may also

    owe suppliers. Shareholders equity is essentially the

    net worth of the business.

    Before you even begin analyzing the balance sheet,

    simply remember the fundamental rule

    Asset= Liabilities+ Shareholders Equity

    At this point, you all are probably baffled at

    what I am talking about. How is it useful for someone

    to know how much assets, liabilities, and shareholders

    equity a company has? Believe me, it is extremely

    important. If we look at the break down of these three

    categories, you will start to understand why.What goes under asset? Too many things. But

    the important ones that you are expected to know fall

    under the sub-categories of current assets and long-tern

    assets. The differences between these three categories

    are that current assets can be easily converted into cash

    within one year. The typically line items that you will

    see are cash, accounts receivable, inventory, etc.

    Long-term assets are a little different. They are

    typically assets that are owned for a long time and

    contribute to the companys operations. Think about

    lant ro ert and e ui ment. The factories!

    UREntrepreneursMonthlyArticle

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    Liabilities operate in a similar manner. Liabilities can be split into current

    liabilities and long-term liabilities. The key factor that separates these two categories is

    the time period of payment. Current liabilities are expected to be paid within one fiscal

    year while the latter is greater than one year. So what are some of the liabilities that we

    should be familiar with, especially for interviews? Debt is always number one! Accounts

    payable is also very common.

    Shareholder equity as we had discussed is the companys net worth. Always

    remember the general formula

    Asset= Liabilities+ Shareholders Equity

    Shareholders Equity = Asset - Liabilities

    So if we re-arrange it, you will see that shareholders equity is just the difference between

    assets and liabilities. Thats the balance sheet!

    RememberthetimewhenLehmanBrothersHoldingfiledforbankruptcy?WhataboutwhenBearStearnshadnooptionbuttoengageinemergencysales?Fiveyearsago,itwouldbehardtoimaginethathappeningtothebulgebrackets.Today,itisnolongerthecase.BothGoldmanSachsandMorganStanleyareregardedasrespectableandstableinvestmentbanks.However,afterthefinancialpanicthattookplace,therehavebeentalksaboutGoldmannolongerbeingthe

    goldeneggandthatMorganStanleywillnotbeabletopreserveitscurrentstandingasanindependentinvestmentbank.TheCEOofMorganStanley,JackMack,inanattempttocountercriticsclaims,said,"[Thefirmhas]strongearningsand$179billioninliquidity-thereisnorationalbasisforthemovementsinourstockorcreditdefaultspreads."Althoughtheheadsofbothcompaniesemphasizedthattheyarefinanciallycapableofmaintainingtheirstatusquo,externalanalystsseemtodisagree.Lookingatthenumbers,bothGoldmanandMorganStanleyarenotinsuchsoundpositions.Recently,sharepriceshaveplungedwhichreflectedinvestorsfearonthebanksstability.Goldmanexperiencedadropof14%whileMorganStanleysawtheirpricesfallby24%.Asthefinancialcrisiscontinues,thesetwofirmsmaybeforcedtosellthemselvestocommercialbanksthatcanprovidethemwithreliablestreamsoffunds.Further

    fearofcreditdefaultswithinthegeneralinvestmentmarkethasfurthercreatedanadverseatmosphereforGoldmanandMorganStanleyasanxiousinvestorsbiduppricesofinsuranceondebtissued.Withthecurrenteconomicenvironment,itishardtodeterminewhichwaythependulumwouldswing,butbothcompaniesvowedtomaintaintheirpositionastraditionalinvestmentbanks.

    ABasketofBrokenEggs

    HowtoAn

    alyzeFinancialStatements(BalanceSheet)

    -OranichAimcha

    roen14

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