Understanding a company’s financial statement is crucial for investors looking to make informed decisions. These documents, released biannually around February and August, provide insight into a company’s performance, informing share prices and investment strategies. In Australia, most companies conclude their financial year on June 30, leading to full-year results published in August and half-year results in February. This timing creates a flurry of activity in business news as analysts and investors evaluate the financial health of various enterprises.
What Are Company Financial Statements?
Company financial statements serve as a snapshot of a business’s financial health. They illustrate what a company owns, owes, earns, and spends, akin to an annual health check-up documented in numerical form. These statements are prepared according to Australian Accounting Standards and are accessible for free on company websites, typically located in the investor or annual reports section, as well as on the Australian Securities Exchange (ASX) website.
For those new to investing, starting with the big picture is essential. The half-year report includes a trading update, while the chief executive’s letter in the full-year report summarises the company’s performance in straightforward language, discussing results across various business segments.
Diving into the Numbers
Following the overview, the statement of profit or loss reveals whether the company has made a profit or incurred a loss during the period. Revenue reflects what the company has earned, excluding any costs, while net profit after tax (NPAT) shows total income minus expenses, indicating the profit available to shareholders after taxes are settled. This figure is a primary focus during reporting season.
Another term frequently encountered is EBIT, or earnings before interest and tax. This metric assesses profit from core operations before accounting for financing costs and taxes, thus serving as a measure of underlying profitability. Earnings per share (EPS) further breaks down the company’s profit, attributing it to each ordinary share.
After grasping the overarching performance, the statement of financial position offers insight into what the company owns versus what it owes. Investors should examine the percentage of total assets that consist of liabilities. Understanding current assets and liabilities—expected to be converted to cash or settled within 12 months—is crucial for liquidity assessment. A negative equity figure indicates that a company owes more than its assets are worth, which is why this document is often referred to as the balance sheet.
It is important to differentiate between cash and profit. Revenue and expenses are recorded in the reporting period they occur, not necessarily when cash is exchanged. This means that a company could report a healthy profit while experiencing poor cash flow. For instance, if a company sells to many new customers in June on credit, the sales are reflected in June’s profit figures, but cash does not increase until those customers pay.
The cash flow statement details the cash inflows and outflows, highlighting how much is paid to investors as dividends. Understanding these dynamics can be pivotal for evaluating a company’s financial stability.
Market Expectations and Investment Insights
Financial markets consistently evaluate future performance. If a company’s profit aligns closely with market expectations, the share price may remain stable. Conversely, if the results exceed expectations, the shares may surge, while missing estimates often leads to a decline in share value. The company’s outlook for the upcoming period can significantly impact its stock performance, making this commentary essential for investors.
To contextualize a company’s results, it’s beneficial to review media coverage from reputable sources, such as The Australian Financial Review. For those without subscriptions, local libraries often offer free access to valuable financial news.
Investors should look for positive indicators such as consistent growth in revenue, profit, and cash flow, alongside having more assets than liabilities, with manageable debt levels. Positive operating cash flow is also a key sign of a healthy business.
Warning signs include declining revenues, low profits, or outright losses. A one-off gain, such as from an asset sale, can temporarily inflate results. Additionally, a higher level of current liabilities compared to current assets or frequent changes in auditors or senior management can signal potential issues.
By following these guidelines for reading financial statements, investors can enhance their decision-making process. For personalised investment advice, consulting a registered financial adviser is recommended.
This article is part of a series that aims to demystify essential business, economics, and finance concepts. Understanding financial statements is a foundational skill for any investor, and being informed can lead to more successful investment experiences.
Michelle Cull is a member of CPA Australia, the Financial Advice Association Australia, and serves as President Elect of the Academy of Financial Services in the United States. She co-founded the Western Sydney University Tax Clinic, which has received funding from the Australian Taxation Office. Ushi Ghoorah serves on the Australian Accounting Standards Board (AASB) and has been involved in research projects related to financial reporting.
