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Teacher guide · Unit 8 of 13

Company Analysis

Reading the three financial statements and deciding what a business is worth.

Lessons
6
Reading
49 minutes
Unit quiz
5 questions
Class time
2 periods

Class time is a guide: 45-minute periods, with the lessons, the unit quiz and a discussion. Students can read lessons at home and take the quiz in class, or the other way round.

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By the end of the unit, students can

  • read an income statement and work out a company’s margins
  • read a balance sheet, and use the current ratio and debt-to-equity
  • explain why cash flow can tell a different story from profit, and what free cash flow is
  • explain what a P/E ratio is saying, and why it means little without context
  • build a simple discounted cash flow model, and see how much it depends on its assumptions
  • research how a company is run and how it treats people, past its marketing

The lessons

Each ends with a one-question check, and students who pass the unit quiz can go on to three optional stages of harder lessons, for bronze, silver and gold medals.

  1. 8.1Income statements8 min

    A video, not a photo: did this company make money over this period?

  2. 8.2Balance sheets8 min

    One instant in time, showing what a company owns and what it owes.

  3. 8.3Cash flow statements8 min

    Profit is an opinion. Cash is a fact.

  4. 8.4P/E ratios8 min

    A low P/E does not mean cheap. It means the market has an opinion about the future.

  5. 8.5DCF models9 min

    A machine for converting your assumptions into a number that looks authoritative.

  6. 8.6Researching how a company treats people8 min

    Every company says it cares. The filings show whether it does.

New Jersey Standard 9.1

The grade 12 expectations this unit teaches, quoted from the state’s standard. See the full alignment for every unit.

  • 9.1.12.CP.6Partly covered

    Explain the effect of debt on a person’s net worth.

    In this unit: Balance sheets

  • 9.1.12.CFR.3Covered

    Research companies with corporate governance policies supporting the common good and human rights.

    In this unit: Researching how a company treats people

  • 9.1.12.CFR.6Partly covered

    Identify and explain the consequences of breaking federal and/or state employment or financial laws.

    In this unit: Earnings quality and red flags (Silver stage)

Questions for discussion

  1. “Profit is an opinion. Cash is a fact.” How could a company report a profit and still run out of cash?
  2. Changing one assumption in a DCF by a single point can swing the answer widely. Is the model still useful? What is it actually good for?
  3. A company’s sustainability report and its proxy statement tell different stories. Which would you trust, and why?

Unit quiz answer key

Checking whether you teach a class…