The company’s financial statements are one of the important documents that must be owned by every company. Financial reports provide information about the overall financial condition of the company and provide an overview of the company’s performance over a certain period of time. In financial reports, there are various kinds of information, such as balance sheets, income statements, cash flow reports, and notes to financial statements.
Reading the company’s financial statements is very important to understand the company’s performance and financial condition, both for investors, business owners, and other related parties. However, not everyone has adequate financial background to be able to read and understand company financial reports easily.
Therefore, in this article we will discuss how to read a company’s financial statements, so that readers can understand the information contained in them more easily and accurately.
Understanding the Structure of Company Financial Statements
To be able to read and understand a company’s financial statements, we first need to understand the structure of a company’s financial statements. The financial report consists of several main sections, namely:
1. Balance Sheet
The balance sheet is the part of the financial statements that presents information about the company’s financial position at a certain time. The balance sheet consists of two sides, namely assets (assets) and liabilities (liabilities). Assets are everything that is owned by a company that has economic value, while liabilities are all obligations that must be paid by the company.
2. Profit and Loss Report
The income statement is a part of the financial statements that presents information about revenues, expenses and profits or losses generated by the company within a certain period of time.
3. Statement of Cash Flows
The statement of cash flows is a part of the financial statements that presents information about the flow of cash in and out of the company within a certain period of time.
4. Notes to Financial Statements
The notes to the financial statements are part of the financial statements which contain detailed information about the company’s assets, liabilities and equity as well as other information that is relevant to the company’s financial condition.
Steps to Read Financial Statements
The following are some steps for reading company financial statements:
For example, you want to read company ABC’s financial statements, which consist of a balance sheet, income statement, and cash flow statement. Here are some steps you can take:
a. Check Balance
Examine the balance sheet of company ABC and note the total assets and liabilities. If the total assets are greater than the total liabilities, it means that company ABC has a net worth. However, if the total liabilities are greater than the total assets, it means that company ABC has more debt than its assets.
b. Profit and Loss Report analysis
Analyze company ABC’s income statement to see the resulting revenues, expenses, and profit or loss. If company ABC’s revenue has increased from the previous year, but costs have also increased, it means that company ABC has experienced little increase in profits or even a loss. However, if revenues increase and costs decrease, it means that company ABC has experienced a significant increase in profits.
c. View the Cash Flow Statement
View company ABC’s cash flow statement to see cash flowing in and out. If company ABC’s cash inflows are greater than cash outflows, it means company ABC generates more cash. However, if cash outflows are greater than cash inflows, it means that company ABC is short on cash or is spending more money than it is generating.
d. Use Financial Ratios
Use financial ratios such as liquidity ratios and profitability ratios to help understand the performance and financial condition of company ABC in more detail. For example, if company ABC’s liquidity ratio is low, it means that company ABC may have problems with its ability to meet its short-term obligations. However, if the profitability ratio is high, it means that ABC company has the potential to generate greater profits.
Reading company financial statements can indeed seem complicated and confusing for some people. However, by following the methods mentioned above, you can understand company financial reports more easily and accurately. It is important to remember that reading a company’s financial statements is important for investors and business owners in making the right business and investment decisions.
However, keep in mind that reading a company’s financial statements is only the first step in understanding a company’s performance. After understanding a company’s financial statements, it is important to carry out a more in-depth analysis and consider external factors such as competition in the market, economic conditions, and government regulations.
Focus on the Company’s Cash Flow
Reading company financial statements is often a scourge for some people, especially for those who have no financial or business background. One of the financial reports that is often confusing is the cash flow statement. Even so, the cash flow statement is actually an important tool for understanding a company’s financial condition.
Cash flow statement is a financial report that shows the incoming and outgoing money from the company during a certain period. This report records cash flows from the company’s three main activities, namely operating, investing and financing activities. Although it looks simple, the cash flow statement provides very important information about a company’s financial condition.
In reading a cash flow statement, focus on a company’s positive or negative cash flows. Positive cash flow indicates that the company is making more money than it spends, while negative cash flow indicates the opposite. If negative cash flows persist over a long period of time, then the company may have serious liquidity problems.
Furthermore, it is also important to pay attention to the factors that contribute to these cash flows. These factors can be increased sales, cost savings, investments made by the company, or even poor market conditions. By understanding these factors, you can predict future cash flows and make the right decisions regarding investing or buying company shares.
Not only that, paying attention to changes in cash flow from time to time is also important. This change can give an idea of whether the company is experiencing growth or vice versa. For example, if cash flow from operating activities increases from year to year, then the company may be experiencing good growth.
