The financial report in your first contact with a company

When you start to take an interest in investing on the stock market, you very quickly come across many different sources of information. Some are short and simplified, others full of charts, figures and comments that at the start may seem too technical. In this flood of content it is easy to get the impression that understanding a company requires specialist knowledge right from the start. Meanwhile, there is one document that it really is worth starting from. It is the financial report.

A financial report shows what is happening in a firm from the side of the figures. Thanks to it you can see how much the company earns, how much it spends, whether it has debts, whether it holds cash and what its situation looks like at a given moment. For an Elegant Investor who wants to invest long-term, this is a very important point of reference, because it lets you look at a company more broadly than only through the lens of the share price. The price on the chart shows how the market values the firm on a given day. The financial report shows what is really happening inside.

Many women at the start are afraid of such documents, because they are associated with something difficult, formal and written in a language meant for accountants. This is understandable. The good news is that you do not have to know everything at once to start reading them. It is enough to know what a report is, what it is made up of and which elements to look at first. When you put these basics in order, the whole topic becomes much clearer.

What a financial report is and what function it performs

A financial report is an official document published by a company listed on the stock exchange. Its task is to show the firm's financial situation and the results achieved in a particular time. Thanks to this investors, shareholders and analysts can check how the business operates, whether it is growing sales, how it manages costs, whether it has large debt and whether it generates cash.

To put it most simply, a financial report is a collection of the most important information about a firm's condition. It can be compared to a regular health check of a business. If you want to know whether a company is growing, whether it has solid foundations and whether its situation looks stable, a financial report gives you much more than a short article in the media or a single comment on the internet.

It is also worth telling apart two concepts that often appear next to each other. A financial statement is the part of the report containing the numerical data and detailed explanations. A periodic report is a broader concept. Apart from the figures themselves it can also include the management's commentary, a description of the most important events in the firm, information about risks and additional explanations concerning the company's activity. For a beginner Elegant Investor this second element is often very helpful, because it lets you better understand what the revenue, costs, profit and other financial data shown in the report result from.

When companies publish financial reports

Companies listed on the stock exchange publish reports regularly. Most often these are quarterly, half-year and annual reports. Each of them shows the firm from a slightly different perspective, though the goal stays the same. It is about presenting the results and financial situation for a particular period.

A quarterly report covers three months of activity. It is a document that lets you follow what is happening in the firm during the year. For an Elegant Investor this means the possibility of observing changes on an ongoing basis. You can check whether revenue is rising, whether profit is improving, whether debt is falling or rising.

A half-year report covers six months and usually gives a slightly broader picture than a quarterly report.

The annual report is the most extensive, because it sums up the whole year of the firm's activity and usually contains the broadest range of data. It is precisely the annual report that most often becomes the starting point for a calmer analysis of a company. It contains a fuller description of the activity, more explanations and usually shows best in what condition the firm ended the year. For many companies the annual report also contains the opinion of an auditor, meaning an independent expert who checks the correctness of the financial statement.

At the start you do not have to know the exact publication dates for each market. It is enough to know that companies announce results cyclically and do so according to a set schedule. Such a calendar can usually be found on the investor relations page of a given firm.

What a financial report is made up of

This question comes up very often, because for many Elegant Investors a financial report looks like one large document. In reality it is made up of several parts, and each of them answers slightly different questions. When you get to know their functions, the whole stops giving the impression of being chaotic.

The first important part is the balance sheet. The balance sheet shows what the firm owns and where the funds for financing this property come from. In practice this means that you see assets and liabilities.

Assets are the company's property, for example cash, real estate, stock, receivables from customers, or various other components of property.

Liabilities show from what sources this property was financed. There you find equity and obligations, meaning among other things loans, borrowings or other debts.

The second part is the profit and loss account. It is precisely here that you can see how much the firm earned on its activity and what costs it incurred. Concepts such as revenue, operating costs and net profit appear in this place.

Revenue is the money from the sale of products or services.

Costs are the expenses connected with running the business.

Net profit is the final result after taking into account all costs, taxes and other charges.

The third part is the cash flow statement, often also called cash flow. This section shows how cash flowed into the firm and how it flowed out of it. This is a very valuable part of the report, because it lets you assess whether the company actually generates money, or only shows a profit on paper. Sometimes a firm may show a positive net result and at the same time have weak cash flows. For an Elegant Investor this is an important signal that it is worth looking at the activity more closely.

Apart from this, the report also contains explanatory notes. These are additional explanations to the figures visible in the main tables. If in a given year debt rose strongly, a large one-off cost appeared or the value of property changed, it is precisely in the notes that more exact information can often be found. For a beginner Elegant Investor this part may seem less accessible, but with time it becomes very helpful.

How to read a report without getting lost in it

One of the more common mistakes at the start is trying to read the report from the first to the last page, the way you read a book. In practice it is better to approach it more selectively. First it is worth seeing the general picture, and only later going into the details.

A good beginning is the short description of the company's activity and the management's commentary. Thanks to this you can immediately understand what the firm does and how it itself explains its results. Next it is worth moving on to the profit and loss account, because it is there that it is easiest to see the basic data about revenue, costs and the final result. The next step is the balance sheet, which shows the property situation and the level of debt. Later it is good to look into the cash flow statement, to check whether the company generates cash from its core activity.

For a beginner Elegant Investor it is very helpful to ask yourself a few simple questions while reading.

1. Is revenue rising or falling?
2. Is the firm earning?
3. Does it have a lot of debt?
4. Does it have cash?
5. Do the results look stable, or do they fluctuate strongly?

Such questions help keep your attention on what matters most.

It is also worth remembering that a single report says relatively little if you look at a firm long-term. Far more is given by comparing several reports from different periods. Thanks to this you can see whether the company improves its results regularly, or rather has a one-off better quarter. In long-term investing it is precisely such continuity that matters a great deal.

A simple example of what you can notice in a report

Imagine a company that sells cosmetics online. In its latest report you see that its revenue rose from 100 to 130 million units of currency. At first glance this looks very good. Sales are rising, so you might think the firm is developing dynamically. When, however, you look deeper, it turns out that costs rose even faster. As a result, net profit is lower than a year earlier.

Next you move on to the cash flow statement and see that there is also less cash from operating activity. This may mean that the firm is selling more, but doing it less efficiently, or that it needs greater outlays to keep up the growth. When you look into the balance sheet, you may additionally notice a rise in debt. Then the picture of the company becomes fuller. The mere information about rising sales stops being enough.

Such an example shows that a financial report helps you look at a company more broadly. It is not only about one numerical piece of information, but about the relationships between different elements. This is exactly why a report is so valuable in analysing a firm.

What is worth checking in a report at the start

When you are only just learning to read reports, it is good to focus on a few basic elements. At the very start it is worth paying attention to revenue, net profit, cash from operating activity and the level of debt. These four areas already give a fairly good first picture of a firm.

• Revenue shows the scale of sales.
• Net profit tells you whether, after subtracting costs, the firm is left with a positive result.
• Cash from operating activity lets you assess whether the business really generates money.
• Debt shows to what extent the company uses external financing.

Of course later you can analyse much more, but for a start it is precisely these elements that help you get used to the report and build the first analytical habits.

It is also helpful to check whether the company explains important changes in a simple and logical way. If a firm shows worse results, but clearly explains what they result from, it is easier to understand the situation. If the data are inconsistent, and the explanations very general, it is worth keeping greater caution in interpretation.

The financial report and long-term investing

In a long-term approach a financial report has special significance, because it lets you assess a firm on the basis of its activity, and not only on the current emotions of the market. The share price can rise and fall for many reasons, including ones that are momentary. The report, on the other hand, shows whether the business is developing in a lasting way.

For an Elegant Investor who wants to build knowledge and better understand companies, regularly looking into reports is a very valuable habit. With time you begin to notice the relationships between sales, costs, cash and debt. You learn to look at a firm through the lens of the quality of its activity. It is precisely here that a more mature approach to analysing companies begins.

It is not about being able to interpret every detail right away. Much more important is to get used to reports gradually and to learn to ask good questions.

1. What does the firm do?
2. What does it earn on?
3. Are the results improving over time?
4. Does rising sales translate into a better result and cash?

Such regular observation gives much more than a superficial following of headlines.

What to remember after reading

A financial report is an official document of a company that shows its financial situation and the results of its activity. It is published regularly, most often as a quarterly, half-year and annual report. It is made up above all of the balance sheet, the profit and loss account, the cash flow statement and additional explanations. Each of these parts answers different questions, and together they create a fuller picture of the firm.

For a beginner Elegant Investor a financial report may seem demanding, but once you get to know the basics, its layout becomes much more understandable. It is one of those documents that it really is worth getting used to, if you want to develop your knowledge of the stock market and better understand companies. It is precisely there that the information is found which lets you look at a firm matter-of-factly, attentively and with greater awareness of what is happening behind the name visible on the stock-exchange list.

Sources:

International Financial Reporting Standards Foundation (international standards for financial statements, https://www.ifrs.org), U.S. Securities and Exchange Commission (investor education on financial reports and disclosures, https://www.sec.gov), ESMA, the European Securities and Markets Authority (rules on periodic reporting in the EU, https://www.esma.europa.eu), CFA Institute (investor education on reading financial statements, https://www.cfainstitute.org), Investopedia (definitions of balance sheet, profit and loss account and cash flow, https://www.investopedia.com)

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