How to Read Business/Share Financial Statements

Share investors need to know and understand how to read financial reports. For share investors, reading the financial statements is mandatory to be more confident in investing. Understanding and knowing the performance of a company from its financial statements is called fundamental analysis. The price of a company’s share is usually based on its fundamentals. If the fundamentals are good, the share price will tend to rise, and vice versa.

Generally, there are four reports submitted by an issuer in a financial report both quarterly and annually, namely the Income Statement, Balance Sheet, Changes in Capital Report, and Cash Flow Report.

1. Net Profit
Good companies have an increasing net profit or profit. For example, the net profit on January 16, 2023, is higher than on January 16, 2021. The calculation of net profit starts from the total equity.

2. ROE at a Level of 15% or More
ROE or Return on Equity is the rate of return on investment obtained. Every profit of Rp1,000 can generate a minimum net profit of 15% or more within a year. ROE is the most basic indicator of fundamental analysis. If the ROE is fairly good, other elements in the financial statements are likely to be good. However, if the ROE is less than 15%, the company is not profitable.

How to calculate ROE:
Current period profit of NILAJ on January 16, 2023 = Rp640.8 billion (9 months)
Total equity = IDR 3.3 trillion
Current year profit = Rp854.4 billion
ROE = Rp854.4 billion : Rp3.3 trillion x 100 = 25.8%
This means that every investment of Rp1,000 in NILAJ generates a yearly net profit of around Rp250.

3. Dividend 30-40% of Net Profit
The dividend distribution data contained in the financial statements is also important. Investors can find this information on the internet by reading the total dividends distributed. For example, 80% of the company’s net profit in 2021 is Rp500 billion. Don’t just look at the interim cash dividend.

Dividend data is important because it helps companies provide a certain amount of net profit to investors. However, if dividends are not paid, the legitimacy of profits is questioned.
Dividends of less than 30-40% are considered too low, investors are entitled to more than that. However, if it is more than this percentage, it may also indicate that the company is mature or cannot grow anymore. In the end, the profits are divided among investors. Thus, find companies that pay not too high and not too low dividends.

4. Reasonable Amount of Debt
Debt on the financial statements is called a liability. If the value of liabilities or debt is greater than the value of equity, you need to watch out. Nevertheless, not all financial reports can be generalized. Some companies consider that the value of debt may be equal to the value of equity and that is a reasonable thing.

5. Debt with Low Interest
A good company has a debt with low interest such as bank loans as well as low bonds. This is because debt with high interest will burden the company’s operations, thereby reducing net income. Bank debt is different from business debt as there is no interest in business debt. Thus, the amount of debt payments for the purchase of raw materials remains the same (without interest) as the amount of the initial purchase.

6. Value of Positive Profit Balance
The equity section of the financial statements covers the contributed capital, additional contributed capital (accumulative), and retained earnings (accumulative). The profit balance must be positive and when added up the value must be greater than the total contributed capital.

If the profit balance is minus, it means that the company’s income was negative for a long time. If the profit balance is positive and is less than the total contributed capital, a bad thing is also suspected.

Regarding this case, there are two possibilities. First, the company’s profits have always been small so the retained earnings have not experienced a significant increase. Second, the company might generate a large profit, but the profit is used to pay dividends continuously, making the value of equity stuck.

7. Asset Turnover Ratio
The formula is the value of sales or revenue divided by the total value of the company’s assets. The greater the Asset Turnover Ratio is, the better the company. Find shares from companies with a high Asset Turnover Ratio.