Which bit(s) of a financial report should I be looking at?
October 19, 2015 5:03 AM Subscribe
Hi. I want to know which bits will tell me how well off an organisation is. I want to compare a few universities. I have their annual reports which include their financials for the year but I'm not sure which bits are meaningful for what I want to know.
I'm doing some research on university partnerships with big pharma. University A took the money that Universities B, C and D rejected.
I want to know if university A is significantly poorer than the others, and maybe that's why they took a deal no one else would touch. The other universities rejected the proposal as unethical and felt it would tarnish the reputation of the institutions, as well as the reputation for research in general, so I am also interested to see if any of B, C or D could have really done with that money but still turned it down. It was $15 million over 5 years in case that matters.
I have their annual reports. They all have a balance sheet, a statement of comprehensive income, a statement of cash flows and a statement of changes in equity.
Which bits of which will tell me what I want to know?
Thanks.
I'm doing some research on university partnerships with big pharma. University A took the money that Universities B, C and D rejected.
I want to know if university A is significantly poorer than the others, and maybe that's why they took a deal no one else would touch. The other universities rejected the proposal as unethical and felt it would tarnish the reputation of the institutions, as well as the reputation for research in general, so I am also interested to see if any of B, C or D could have really done with that money but still turned it down. It was $15 million over 5 years in case that matters.
I have their annual reports. They all have a balance sheet, a statement of comprehensive income, a statement of cash flows and a statement of changes in equity.
Which bits of which will tell me what I want to know?
Thanks.
I started out trying to write a reply but then realised you're much better off reading the wikipedia entry on those 4 financial statements instead, because you should have some grounding as to what those statements are and how they relate to each other - they are interlinked, and movements in one of them will cause related changes in the other statements as well.
There are many definitions of "poor" financial health. All the 4 statements contain relevant information to make such a judgement. For someone with a non accounting background to attempt reading financial statements is difficult. That being said, very broadly, here's some things to look out for...
1. A university may simply be losing money and have consistently poor or negative income statements in prior years.
2. A university may have a poor or negative balance sheet and is in danger of failing to meet certain ratio requirements on its existing loans.
3. A university may have a healthy balance sheet but has upcoming liabilities it needs to cover (a maturing loan in the next month) and low liquidity (most assets are non cash). You can tell by looking at the maturation dates of their liabilities and the classes of assets it is holding.
4. A university may have a healthy income statement but unhealthy cash flow statement, for example, they may have struck a deal to sell some assets (which hits income statement immediately) but only receive cash at a later date.
posted by xdvesper at 6:32 AM on October 19, 2015 [7 favorites]
There are many definitions of "poor" financial health. All the 4 statements contain relevant information to make such a judgement. For someone with a non accounting background to attempt reading financial statements is difficult. That being said, very broadly, here's some things to look out for...
1. A university may simply be losing money and have consistently poor or negative income statements in prior years.
2. A university may have a poor or negative balance sheet and is in danger of failing to meet certain ratio requirements on its existing loans.
3. A university may have a healthy balance sheet but has upcoming liabilities it needs to cover (a maturing loan in the next month) and low liquidity (most assets are non cash). You can tell by looking at the maturation dates of their liabilities and the classes of assets it is holding.
4. A university may have a healthy income statement but unhealthy cash flow statement, for example, they may have struck a deal to sell some assets (which hits income statement immediately) but only receive cash at a later date.
posted by xdvesper at 6:32 AM on October 19, 2015 [7 favorites]
Also, because this is higher ed, take a look at their endowments, and particularly if they are moving money into their endowments each year.
posted by anastasiav at 6:44 AM on October 19, 2015 [2 favorites]
posted by anastasiav at 6:44 AM on October 19, 2015 [2 favorites]
Right. Good advice above which you won't necessarily find pleasing. It takes a lot of work.
Specifically, and certainly in the U.S., you would look at endowment, the endowment's investment, and its rate of return. Also you would look at the fees associated with the handling of the endowment. (See: Yale.) And you would look at enrollment, trends in government aid for students, and trends in alumni giving.
But you're going to have to do this like we reporters do... slowly and carefully, you'll have to read their financial reports until it all makes sense to you, google terms you don't know, and see what's different between the schools as a picture emerges. It doesn't sound like fun, but once you get over the steep part of the learning curve, it is kinda fun!
posted by RJ Reynolds at 6:57 AM on October 19, 2015 [2 favorites]
Specifically, and certainly in the U.S., you would look at endowment, the endowment's investment, and its rate of return. Also you would look at the fees associated with the handling of the endowment. (See: Yale.) And you would look at enrollment, trends in government aid for students, and trends in alumni giving.
But you're going to have to do this like we reporters do... slowly and carefully, you'll have to read their financial reports until it all makes sense to you, google terms you don't know, and see what's different between the schools as a picture emerges. It doesn't sound like fun, but once you get over the steep part of the learning curve, it is kinda fun!
posted by RJ Reynolds at 6:57 AM on October 19, 2015 [2 favorites]
I want to know if university A is significantly poorer than the others, and maybe that's why they took a deal no one else would touch. [...] Which bits of which will tell me what I want to know?
As far as I can tell a lot of the "why" questions about higher ed funding tend to have answers that lie in the interpersonal relationships and contacts of a few people (top university people such as presidents/deans/trustees, prominent individual donors who are often very much the 0.1%, etc), rather than rational strategic thinking on the part of an organization. So I would also try to dig into the governance structure of the various universities and see who actually could make this kind of call, how much oversight there is and from whom (is there a faculty senate) etc. I would guess that the _kind_ of person who has oversight on this sort of decision in a particular university might matter at least as much as the financial question.
posted by advil at 7:23 AM on October 19, 2015 [1 favorite]
As far as I can tell a lot of the "why" questions about higher ed funding tend to have answers that lie in the interpersonal relationships and contacts of a few people (top university people such as presidents/deans/trustees, prominent individual donors who are often very much the 0.1%, etc), rather than rational strategic thinking on the part of an organization. So I would also try to dig into the governance structure of the various universities and see who actually could make this kind of call, how much oversight there is and from whom (is there a faculty senate) etc. I would guess that the _kind_ of person who has oversight on this sort of decision in a particular university might matter at least as much as the financial question.
posted by advil at 7:23 AM on October 19, 2015 [1 favorite]
Two thoughts in addition to what was already answered. One, read the footnotes to the financial statements. Sometimes, some of the most important information is "buried" in there. Two, I don't know how research funding works, but if the department getting the grant money has to "tip out" to the university as a whole, I would look at that rate or amount.
Also, universities have different standards and norms. Maybe the one that accepted the money did not feel it would tarnish their reputation. Maybe they plan to proceed and make full disclosure about the nature and source of the funding for the research.
posted by AugustWest at 7:47 AM on October 19, 2015 [1 favorite]
Also, universities have different standards and norms. Maybe the one that accepted the money did not feel it would tarnish their reputation. Maybe they plan to proceed and make full disclosure about the nature and source of the funding for the research.
posted by AugustWest at 7:47 AM on October 19, 2015 [1 favorite]
One thing worth thinking about: if you're comparing a group of only four relatively similar universities, it is likely that each of the four has the weakest financial position by at least one measure if you consider many different measures.
posted by kickingtheground at 10:42 AM on October 19, 2015 [1 favorite]
posted by kickingtheground at 10:42 AM on October 19, 2015 [1 favorite]
The two things I would look out is size of the endowment per student and the tuition discount rate. Those two things will give you the best snapshot of the financial health of the college (particularly if you also consider things like money in/out of the endowment and the discount rate averaged over a few years).
posted by Betelgeuse at 11:38 AM on October 19, 2015 [2 favorites]
posted by Betelgeuse at 11:38 AM on October 19, 2015 [2 favorites]
Response by poster: fatfrank: the money is to fund a research centre specifically focussing on the kinds of products this company sells. Does this make a difference?
posted by stellathon at 5:19 PM on October 19, 2015
posted by stellathon at 5:19 PM on October 19, 2015
Turning down or accepting funding for a research project could have nothing to do with the overall financial health of a university; they could only spend that money on that project and only use it to fund a researcher's time on that particular project. Funding a centre to do "research" into a given subject area is a bit looser and gives the university a bit more room on how they spend it.
posted by fatfrank at 5:22 AM on October 20, 2015 [1 favorite]
posted by fatfrank at 5:22 AM on October 20, 2015 [1 favorite]
This thread is closed to new comments.
posted by fatfrank at 6:13 AM on October 19, 2015