The Four Financial Statements Used to Analyze a Company’s Financial Performance

Appraising a Company’s Financial Performance

Financial performance refers to the complete evaluation of the overall financial standing of a company in various categories such as liabilities, equity, expenses, revenue, profitability and assets. A company’s financial performance is appraised using various mathematical formulas that enable stakeholders to understand the true financial position of the company.

Financial analysis can be carried out by evaluating a firm’s financial statements to help internal and external users to understand the company’s financial performance. The process of appraising a company’s financial performance involves the analysis of four financial statements of the company: income statement, balance sheet, cash flow statement, and annual report.

1) Balance Sheet

The balance sheet is a balance sheet is a financial statement that reports a company’s assets, liabilities, and equity at a specific point in time. It provides a snapshot of a company’s financial position and is an essential component of financial reporting. In financial statement analysis, an organization’s balance sheet is looked at to determine the operational efficiency of a business.

The balance sheet provides information for asset analysis, which focuses on cash and cash equivalents, inventory, property and equipment, and motor vehicles. Understanding the company’s position in terms of assets is necessary to predict the future growth of the company.

Another type of financial analysis that utilizes the components of a balance sheet is examining long term and short term liabilities to establish the liquidity of the firm and its ability of the firm to pay off its debts. A balance sheet also has an equity section which provides insight about the firm’s share capital.

2) Income Statement

An income statement is a financial statement that shows a company’s revenues and expenses over a period of time, typically a month, a quarter, or a year. It’s also known as a profit and loss statement or P&L statement. The purpose of an income statement is to show how much money a company earned or lost during the period.

The income statement starts with revenues at the top, which includes all the money a company earned from its operations, such as sales revenue, service revenue, and interest income. Then, the expenses are listed below the revenues. The expenses include all the costs associated with running the business, such as cost of goods sold, salaries and wages, rent, utilities, and marketing expenses. The difference between the revenues and expenses is called net income or net loss, depending on whether the company made a profit or a loss during the period.

An income statement is important for investors, creditors, and analysts because it provides a clear picture of a company’s financial performance over a period of time. It can be used to evaluate a company’s profitability, efficiency, and overall financial health. By comparing income statements from different periods or to those of other companies in the same industry, investors and analysts can identify trends and make informed decisions about whether to invest in or lend money to a company.

3) Cash Flow Statement

A cash flow statement is a financial statement that shows the inflows and outflows of cash and cash equivalents during a specific period of time. It provides information about how cash is generated and used by a company, which is important for understanding its financial health and ability to meet its financial obligations.

The cash flow statement is divided into three sections: operating activities, investing activities, and financing activities.

Items in operating activities section of a cash flow statement may include:

  • Net income
  • Adjustments to reconcile net income to cash generated by operating activities:
    • Depreciation and amortization
    • Deferred income tax expense
    • Others
  • Accounts receivable
  • Inventories
  • Other current and non-current assets
  • Accounts payable
  • Deferred revenue
  • Other current and non-current liabilities

Items in the investing activities section include:

  • Purchases of marketable securities
  • Proceeds from maturities of marketable securities
  • Proceeds from sales of marketable securities
  • Cash spent in business acquisitions
  • Cash use for acquisition of property, plant and equipment (PPE)
  • Payments for the acquisition of intangible assets

Items in financing activities section include:

  • Payment of dividends and rights
  • Repurchase of common stock
  • Proceeds from issuance of long term debt
  • Others

This list is not exhaustive. You have to figure out which components in a particular company can generate or spend cash in the form of operating, investing, and financing activities.

The net increase or decrease in cash and cash equivalents for the period is shown at the bottom of the statement. A positive number indicates that the company generated more cash than it used during the period, while a negative number indicates that the company used more cash than it generated.

The cash flow statement is important for investors, creditors, and analysts because it provides information about a company’s ability to generate cash, pay its debts, and invest in its business. By analyzing the cash flow statement, investors and analysts can assess the quality of a company’s earnings and make informed decisions about whether to invest in or lend money to a company.

4) Annual Report

The last statement, the annual report, provides qualitative information which is useful to further analyze a company’s overall operational and financing activities. The annual report consists of all the statements listed above but adds additional insights and narratives on critical figures within the organization.

The additional insights and narratives within the annual report include an extensive narrative breakdown of the various business segments, benchmarks, and overall growth.

Leave a Reply

Your email address will not be published. Required fields are marked *