How to Read Company Financial Statements, Investors Must Know

A successful investor who is dubbed the Warren Buffett of Indonesia, Lo Kheng Hong once said, buy shares of companies with large and growing profits. That’s his strategy to make a fortune from investing in stocks.

Thus, if you want to buy shares of a company, first take a look at the financial statements. The company’s financial statements are the first documents an investor should read in the capital market.

Therefore, investors must be able to read the financial statements of issuers (companies listed on the Indonesia Stock Exchange/BEI). This is just basic knowledge.

Next, analyze the financial statements, so that it will be found out whether the company is good or not in terms of financial performance, profit or loss, shares are worth buying or not.

What is a Financial Statement?

Financial statements are information about company finances that are presented once every 3 months or once a year. Usually this financial report will be read by investors who invest their money in the company, the correct way to read financial statements is to pay attention to several important points, namely:

1. Profit and equity

The first way to read financial statements is that you have to pay attention to the flow of profit and equity, a good company will experience an increase in period profits, current profits and equity. So this is the first thing you should do.

2. ROE or Return Of Equity

Return of equity is a term for the rate of return on investment. Usually, ROE is a point of concern for investors, if ROE is good then other financial reports will also be good. A good ROE is one that makes a profit of at least 15% or more per year.

3. Small debt value

Do not forget to read the value of debt in the financial statements. Companies with small debt values ​​are companies that can pay their debts consistently. However, if you are confused about whether the company’s debt is small or not, you can measure it from the equity value. At the very least, the value of debt must be equal to or less than the value of equity.

4. Interest on small company debt

The interest that must be paid is usually very miserable because the amount is large. In the financial statements, you should look at what is the interest on the debt of a small company? If it’s small, then you can rest easy, because a good company with a small amount of debt interest will definitely not be bothered by arranging finances for interest.

5. The balance of net income is greater than the initial capital

If a company gets a net profit that is greater than the initial capital, then the company can be said to be successful in running its business. The profit earned in a company must be greater than the initial capital because if the amount is the same as the initial capital, it means that what the company is doing in its business is in vain, and if the net profit is smaller, it means the company has suffered a loss.

6. Tax expense amounts to at least 25% of profit

Companies that deserve investment from investors are companies that do not bear much of the financial burden that must be paid, such as debt, interest on debt and taxes. At least the tax that the company has to pay is no more than 25%. The percentage benchmark is already a benchmark that shows that the tax burden borne by the company is not too much.

That’s how to read financial reports that you can apply when confused about reading financial statements. You have to remember that these important points must be considered because they become a benchmark for whether the company is a good company or not

7. Large asset turnover (ATO)

The formula is the value of sales or income divided by the total value of the company’s assets. The bigger the ATO, the better. Look for stocks whose companies have high ATO performance.

8. Inventory turn over is large

The formula is the value of income or sales (in a year) divided by the value of inventory. For example, SIDO scored a sales value of Rp 2.8 trillion. The inventory value is IDR 300 billion.

This means that the company can sell up to 9 times. Including companies with fast turnover. Turnover goes on. Sales value is greater than inventory.

9. Large current ratio

The formula is current assets divided by current liabilities or debts. A good company, the total current assets must be greater than the current debt (short-term debt maturing in a year).

If it shows such performance, it means that the company has no risk of default. But if the opposite condition, it is very dangerous. It could be that the company will find it difficult to pay its debts.

10. Large net income margin

The formula is net income divided by revenue or sales. For example, SIDO’s profit for the current period is IDR 578 billion divided by the value of sales in 9 months of IDR 2.1 trillion, multiplied by 100%, the result is 27%. From an income of IDR 1,000, a net profit of IDR 270 can be obtained.

A good profit margin for manufacturing is 20%. While the trading company distribution of goods at least 10%. So if a manufacturing company prints a margin of less than 20%, it means that it is not good.

11. Ideally after operating profit/operational profit, there is only a tax burden of 25% of the operating profit

Companies whose shares are worth buying must show that they are not carrying too many burdens. For example, there is no interest expense on debt. There is only a tax burden (corporate income tax) of 25% of operating profit before tax.

Investors need to be careful. There are companies whose tax burden is less than 25% of their operating profits. Chances are it’s not real profit. Only recorded in the books.

12. Ideally the comprehensive income figure is not much different from the current year (period) net profit figure

Profit for the period and comprehensive income are different. Profit for the period or net income is that which comes from the company’s operations. Although the numbers are real and some are not.

Meanwhile, comprehensive income is income or debt expense that has nothing to do with company operations. An example of an employee benefit liability. That is the company’s debt to employees that will be paid at the time of retirement later.

The money is placed in a pension fund company, for example, so that it can be rotated. The company can benefit from the capital turnover. And must still be included in the financial statements.

13. The cash flow statement is not much different from the income statement

See the section “Cash Flows from Operating Activities,” then compare it to the value of sales or revenue and profit for the period.

For example, SIDO. The value of acceptance from customers with the value of sales is only slightly different. Likewise with net cash obtained from operating activities with profit for the period. The value is not much different.

If the numbers are exactly the same it is impossible. But you need to be careful if it turns out the value is much different. This means that income is only bookkeeping, not really any money.

14. The balance sheet is ‘clean’ and simple. So is the income statement

Pay attention to financial statements, simple, uncomplicated or complicated in the assets, equity, liabilities or debt sections, and others.

15. For the year-end financial statements, the audit results are unqualified

This is also important for investors. View audited year-end financial statements. It is on the front page, there is a report from the auditor.

Just read at the end with the subtitle “OPINATION.” It says “Naturally.” The majority of companies almost certainly get the title of Unqualified Financial Statements.

But there are some companies whose public opinion is not like that. Written Fair, but there is emphasis or notes in certain things. This should be studied further by investors.

The audit results are not a guarantee of a good company’s financial statements. How come there are financial reports that are engineered and must be restated.

However, if from the outset the financial statements have an unqualified opinion, then the risk is smaller than the unqualified opinion.

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