Simple Guides To The Analyzing Of The Financial Statements In The Annual Report

In the earlier article on the content of an annual report,it was mentioned that besides the many other documents,we also have the financial statements.

This article deals with some basic guides that should be incorporated to review/analyze the financial statements:                                  

1. Study the Income Statement and seek answers for the following questions:
   

• Has the profits increased against last year?
• Is there any exceptional/abnormal items re:expenses or incomes that might be unusually large in relation to the business or expenses or incomes that should not  be in the ordinary course of the company’s business? If yes,adjust by deducting or adding to the profit/loss to get the final profit’s figure and then compare again with last year figure.

• Also,we need to find out that if there are exceptional items   say for example write off of certain development expenditure whether this is going to be a recurring item or might just be for expansion purpose which is almost completed hence there might be greater profits in the near figure?
• Use the net margin %  ( profit before tax / sales) to see whether it’s higher than last year? If there is a decline or increase, find out the possible cause.

• Next,in the Income Statement, look at the Earnings Per Share figure. Is there an increase over the previous year? ( remember that increase in absolute profits over last year is not really an increase if more capital/asset are invested by increasing more share capital so Earning per share is really a better indicator)

• Besides profitability trend,the next step is to review the items in the current assets figures to see whether the company is facing any liquidity issues:

• Has the value of the inventory increased significantly over the last year? Is it due to slowdown in sales or poor inventory management?

• Is the Accounts receivables increasing compared to last year? Compute the credit collection dates to see whether the company is facing challenges in collecting payments? Look at the provision for bad debts to see whether it is increasing.

• Review using simple liquidity ratio like the current and acid ratio.

• Ask yourself whether the company is being under-valued re:whether the value of the assets per share is higher than the share price? Looks for Indicators like when was the last time the company’s properties has being revalued,any investments in related companies/joint venture companies that might be undervalued ,etc.
  

• All Topics Under The Heading Of Financial Accounting Ratio Analysis Or The Interpretation Of Financial Statements In The Annual Report
• What Is In An Annual Report?
• Common Size Financial Statements As An Analytical Tool.
• Analyzing A Company’s Performance
• Reading The Chairman’s Statement In The Annual Report.
• Principal Tools Of Analysis Of Financial Statements
• Technical Summary Of IAS 1 Presentation of Financial Statements