Studying a company's financial statements provides an investor with vital information about a company's performance and pointers to its prospects.
Analysing that information using financial ratios – such as the oft-quoted price-earnings ratio – allows comparisons to be made with the past, with other companies in the industry and with the market as a whole.
Financial statements provide specific information about a company's financial position and performance.
Each year, public companies must provide shareholders with an annual report – a document that summarises the results of operations and the company's financial status in the past year.
Reading the annual report – which must be independently audited – is a chance for investors to examine the company's financial strength and performance over the past year and to consider what opportunities there are for future growth.
In Australia, the financial year officially runs from July 1 to June 30, but companies may register another 12-month period as their reporting period.
The financial statements within the annual report consist of a:
- statement of financial performance
- statement of financial position
- statement of cash flows
The statement of financial performance (formerly known as the profit and loss statement) reports the revenue, expenses and profit (or loss) for a given period.
The statement of financial position (balance sheet) is a statement of the book value of a business at a particular point in time. It lists a company's assets, liabilities and the shareholders' claim on the equity in the business.
The statement of cash flows reports the effects of all transactions, whether operational, financial or of an investment nature.
Companies must lodge an annual report with ASIC within four months of the end of their financial year.
That report will be formally presented to shareholders at the annual general meeting (AGM), which must be held within five months of the end of the financial year.
Accounting treatments are important when scrutinising financial statements. The 'notes' accompanying the financial statements contain important information, for instance whether there has been a change in the accounting method used.
Key elements of the statement of financial performance include:
- gross profit
- net profit (after tax)
- earnings before interest and tax
- earnings before interest, tax, depreciation and amortisation
- net operating profit after tax (and expenses)
- one-off items