If I was posting for views, I would shut the accounting series down immediately. Perhaps the lack of passion is because even the best accountants on earth can’t change the rock and without good rock, you are ducked. But- without a good understanding of the financials, you can’t invest in a company. So, open your hearts and love an accountant today.

The income statement!! A vibrant love affair between cash and non cash items that determines the profitability of the business and the flow between BS periods. Remember in math when you had imaginary numbers? In accounting, those are non cash items- like DD&A, impairments, and gains/losses on derivatives. Simply, net income is what is left after all the expenses (but it’s not cash, more tomorrow).

On the income statement, the two items I focus on are interest and S,G&A. When I value a company, I take 3 years worth of these and deduct them from the NAV per share. This is the burn rate the company has to run the business. More on that on Friday. But if you want to know why investors hate O&G companies, it is the drag on income caused by the debt which consumes A LOT of cash that should have been used drilling wells. Unfortunately, headcount is the only “controllable” expense companies can reduce to try to fix it.