I will be analyzing sample individuals and evaluate their finances as if they were a company. How do they stack up if their finances were publicly available? Would investors “buy” their shares?
Name: Diana Nathan
Monthly After Tax Income: $4000
Monthly Expenses: $2800
Home: Yes, $340,000 at 20% down
Diana Nathan is a young professional who has been working at a large company for 3 years straight out of college/university. She is 27 years old and her current salary is $60,000. She has always been a frugal saver and managed to secure a luxury 600 sq ft condo with parking in downtown for $340,000 with a 20% down payment. She is able to walk to work everyday. Prior to purchasing the new home, she was living at home and saving up money. Thanks to her supportive parents, she graduated without any school debt. After the purchase, her savings account balance is roughly $10,000.
She owns a 2013 Acura RSX which is paid off and enjoys eating out several times a week with her friends and co-workers.
This example is very typical of a first time single household homebuyer. They make good income and have been steadily saving up for a few years to qualify for the purchase.
Her monthly expenses are as follows:
Mortgage: $1204 (2.4% interest rate at 25 years)
Condo Fee: $285
Property Tax: $280
Utilities & Internet: $135
Eating Out: $100
Automotive Gas: $50
Automotive Insurance: $125
Automotive Misc: $100
Total: $2800 (Actual: $2829)
What is her balance sheet like?
|Balance Sheet Statement|
|Cash, Checking & Savings Account||$10,000 (Checking & Savings)|
|Short Term GICS|
|Money Owed By Friends & Family|
|All Stocks & Mutual funds|
|Total Real Estate||$340,000 Condo|
|Cars||$20,000 (2013 Acura)|
|Total Other Investments|
|Credit Card Debt||$0|
|Average Monthly Expenses||$2800|
|Money Owed to Friends & Family|
|Long Term Liabilities|
|Line of Credit|
|Home Equity Line of Credit|
|Other Long Term Loans|
|Shareholder’s Equity (Networth): $99,200|
What is her cash flow statement like?
|Annual Cashflow Statement|
|Net Employment Income:||$48,000|
|Net Income/Net Annual Savings: $14,400|
Profitability: Her Profit Margin (Net Income / Net Revenue) is 30%, which is pretty good considering she just bought a home. What this metric means is that after her purchase of her home, she is still able to save 30% of her gross income for either additional down payment or other investing instruments.
Return on Equity: Her Return on Equity (Net Income / Net worth) is 14.4 / 99.2 = 14%. This is an ok number, given that she is a young professional and majority of her cashflow is still based on her salary. As we get older, we should seek to increase cash flow from other sources mainly dividends and capital gain. In general, financial analysts want companies to be in the 15%-20%.
Debt to Equity: Her Debt to Equity (Liabilities / Net worth) is 2.77. This is considered a really high number even when measured against companies. This puts her among the most indebted sectors such as financial companies (2.76) and utility companies (1.41). This is a slight concern because if there is economy downturn and she were to lose her job, then it would be very tough for her to finance monthly expenses. Although we understand the reason was that she bought a condo downtown, she did over extend herself and should have saved for more money for a few more years.
Quick Ratio: Her quick ratio (Current Assets / Current Liabilities) is sitting at 5. Most financial experts look for having over 1.1. So although she has a really high debt obligation, her liquidity (from savings and income) is more than enough to finance her monthly mortgage payments and expenses for several months. She has enough of savings in her checking account for emergency job losses or large bills.
I am giving her an overall score of 7.25/10. Her cashflow and her savings rate is awesome and the only caveat is her high liability (namely mortgage debt). However, as time progresses, I expect her income and debt payments to increase which would drastically reduce her risk of bankruptcy or liquidating her home.