How to get financial report savvy

Step by step, we’re going to run through what you need to know to make sense of a company’s bottom line — and the numbers that inform it.

Proactive Published 10/01/2022

Share X in f @

For those of us who aren’t number crunchers, a company’s financial reports can leave us scratching our heads.

The deluge of facts and figures is far from beginner-friendly and can scare off even the bravest of retail investors.

But what if I told you a company’s financials had more bark than bite?

Getting to know the financials — five tips from the CPA

Before jumping in the deep end, it’s important to ease into the lingo that surrounds financial reporting.

Professional accounting body CPA Australia has put together five key steps to help familiarise yourself with annual reports.

First, the association says doing your homework is key.

“The importance of preparation should not be underestimated when analysing the financial statements of a listed company,” CPA explained in a 2019 paper.

“Making yourself knowledgeable about the environment in which the company operates in now and its direction in the future, for example, getting information about local, national or global macro and microeconomic conditions and the risk profile of the company’s business(es), is a good and necessary start.”

From here, CPA says you should look at the auditor’s report for any modified opinions or other communications — this could hold some hidden gems.

Then, it’s on to the financial statements.

“Have a look at the statement of profit or loss and other comprehensive income and the statement of financial position to assess the size of the company and its profitability,” CPA stated.

Note that sometimes what you pay attention to will differ among listed companies and sectors.

“The level of focus stakeholders place on the different primary statements will depend on the nature of the business,” the accounting body said.

“For example, in sectors where the asset base of the company is very important (such as banking, property, funds management, etc.) the statement of financial position may receive greater attention.

“However, in a company where revenue, profit or dividend payments are important to stakeholders, the statement of profit or loss and other comprehensive income may receive greater attention.

In steps four and five, CPA recommends stakeholders have a look at the statement notes to get the full picture.

Now you’re fully immersed, let’s look at the who, what and when of financial reporting.

How do companies report their financials?

Public companies report on their operations across three key periods: every quarter, every half-year and every year. These are known as the quarterly, interim and annual reports.

The ASX requires companies to be transparent about these financials, and they’re disclosed as market announcements during the reporting cycles.

Some companies go by different cycles to the traditional financial calendar. For example, Westpac’s current financial year ends on September 30, 2022 — that’s when most companies end the first quarter of their new reporting cycle.

You can usually find out when a company is due to release their financials on their website, or by studying the previous reporting dates.

What do companies need to report?

ASX-listed companies know what figures to disclose because of three reporting templates, known as appendices.

These correspond with the three reporting cycles — there’s the 4C cashflow report (or the 5B for oil and gas explorers) for quarterlies, the 4D for interims and the 4E for annual reports.

If a mining stock is a producer, it can release a quarterly report without the 4C, and if a company is involved in mining exploration or oil and gas exploration, it doesn’t have to produce a 4D or 4E.

As a baseline, these appendices give you some of the key information on the company’s financial performance.

The 4Ds and 4Es are pretty short summaries, so a company will also provide a more detailed financial breakdown within their reporting documents — but you’ll have to scroll past all the shiny stuff to find it.

4Cs — making sense of cashflows

The 4C reports — released after every quarter — record how the company’s cash flows changed over a three-month period.

They track three key areas:

Operational cashflow (section 1) - any money made or spent through the normal operation of the business — think cash receipts, admin expenses, product development, etc;
Investing cashflow (section 2) - money tied to the acquisition or disposal of assets — like buying equipment or selling off a side entity; and
Financing cashflow (section 3) - any changes in the company’s capital structure — think capital raise proceeds or any money spent repaying borrowings.

These three sections measure how much money came in or went out across the business, and, added or taken away from the company’s cash position at the start of the quarter, give you how much capital is in the piggy bank by quarter-end.

The cash and cash equivalents figure (marked 4.6) is key — it gives you a sense of how much financial leeway the company has to accomplish its goals in the coming quarters.

If it’s not much, it could be a sign that the company may be looking at a capital raise or some kind of debt financing — or expect to see improved cashflows in the coming quarters based on seasonality or new developments.

This is why section 8 of the 4C is a good litmus test.

By dividing the company’s total available funding — that’s cash and cash equivalents (4.6) plus unused finance facilities (7.5) — by its total relevant outgoings — the net cash from/used in operating activities (1.9) plus any payments for exploration and evaluation classified as investment activities (2.1(d)) — you get the estimated quarters of funding available.

So, if a company’s operational cash flow is in the red — meaning it can’t bring in enough money from cash receipts and other income to cover operating expenses — this gives you a sense of how much further it can go on the same rate of spend.

If there are less than two-quarters of estimated funding remaining, the company must answer three questions:

Does it expect to see this rate of operating cashflow sustained?
Will it take any steps to raise further capital (such as a raise)?
Does it expect to be able to continue its operations?

Interim and annual reports

By understanding a cash flow report, you’re able to navigate one of the key components of an interim or full-year financial statement.

These six and 12-month accounts — which are generally included after the auditor’s signature and remuneration report in an interim or annual paper — will contain the following four modules:

A consolidated statement of profit and loss/an income statement, outlining whether or not the company made bank above and beyond its expenses or fell into the red and measuring any changes in the company’s income over the period;
A balance sheet/financial position statement, tracking the company’s assets, liabilities and equity;
A statement on changes in equity, which measures how things changed compared to the previous financial year; and
A cash flow statement, monitoring any money coming in from operating, investing or financing activities.

CPA Australia needs to work with financial statements on a regular basis and believes they’re key fodder for investors.

“The financial report provides people who are interested in a company – such as shareholders, lenders, analysts, employees and other stakeholders – with information about the financial performance and financial position of the company,” the CPA explained in a 2019 paper.

“It is one means by which directors of the company advise shareholders on how the business has performed during the year.

“The financial report also provides information to shareholders on how the directors have discharged their responsibilities.”

By getting familiar with financial statements and increasing your literacy, you’ll be able to get on the same page as your investments.

It might be confusing to start, but getting tucked in is the biggest challenge — and great rewards await those in the know.