Hi, my dearest friend,
This article is written with the intention to gives a guide as how to have a quick view of a company’s Financial Statements. This will make it easy to discuss with the Financial communities on the financial issues of a company.
When we talk about Financial Statements, what we are referring to is the Company’s Report and Accounts, usually found on the website of listed public companies.
1. The Auditors Report
– should be the first quick check.
This is usually found at the front of the Accounts and it has been drawn up in accordance with Generally Accepted Accounting Policies so as to give a 'true and fair' view of its financial performance. Watch out for any ‘qualifications’ which could highlight any financial problems
2. Principal Activities
Take a quick look at the Directors' report as what are the company's principal activities and the industry it is involved in. This gives you an overall view of the company and its industry where you should focus on.
4. Sales – or Turnover, Revenue.
Reflected on the Income Statement. Note its historical trend and any significant fluctuation; and the cause, if applicable.
The Gross Profit and Operating Profit, both before and after tax, will suggest whether they are selling above their costs. Whereas the percentages against their sales will give you the idea whether its profitability is increasing or declining. As such, the trend analysis may give you a good basis to predict its forecast. However, bear in mind that the historical trend will not guarantee its future performance.
6. Return on Capital Employed (ROCE)
Suggesting the return from what the company have invested in. The Capital Employed basically made up of Shareholders Funds (Share Capital plus Reserves such as retained profits or less Accumulated Loss whichever is applicable).
ROCE is found by dividing the Operating Profit by the Total Capital Employed or Total Assets or Net Assets. This percentage indicates to you whether its return is lower or above the interest rate.
7. Working capital position
Take a quick look of its ratio by dividing its current assets against liabilities. This will give us its liquidity position or the overall situation, i.e. stock, debtors and creditors. Its historical trends will suggest to you whether its liquidity position is improving or declining, an idea of its management efficiency to a certain extent. Above all, its cash flow and whether it able to pay its bills when due.
8. Retained profits / Accumulative Loss
The cumulative bottom line. Retained profits will be the surplus to its shareholders' fund whereas the accumulative loss will reduce its shareholders' fund. The former will allow the company to distribute out through dividend or bonus share and not the latter.
The gearing ratio reflect the relationship of its debt to equity or total capital employed or total assets. It indicates to you as how many times of its debts against the capital and also the interest expense the company has to bear. As such, it give rise to the situation that it will have adverse impact should the interest rate is on the increasing trend. If the ratio is at high side, they will be answerable to the lenders. However, if it is at the low side, the question arises whether they should borrow more to invest.
10. Notes to the Financial Statements
Usually find at the back of the statement, It is rewarding and revealing to take a quick look at its Significant Accounting Policies. Look exactly at what type and nature of assets the company has, both fixed and current; long and short term liabilities as well. Directors Remuneration is of interest and other key mandatory expenses will also be found here. All these notes will usually reference to the items in the respective Income Statement and Balance Sheets.
Trust the above discussion may be used as a good checklist or guide as how to have quick view/ Bird eye's view of any Financial Statements.
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