Guide to Analysing the Value of a Company Via Their Financial Statements

There are many ways to analyse the value of a company, but the most effective is to look at the company’s financial statements. A company releases its financial statements as part of its half-year and full year reports required by ASIC.

There are three main financial statements; Statement of Financial Position, Statement of Financial Performance and Statement of Cash Flows.

We give a brief outline of each of these below.

Statement of Financial Position

This is more commonly referred to as a Balance Sheet, and details the company’s assets (what it owns), liabilities (what it owes) and shareholder’s equity.

The Statement of Financial Position is a snapshot, and reflects the company’s assets and liabilities at a specific date – usually at the end of, or half way through, a financial year.

This statement provides a range of information such as how much cash the company has in the bank, how much stock it has on hand, how much money the company is owed by customers, how much the company owes its suppliers, and of course how much it owes the bank.

The final figure at the bottom of the statement represents the net value of the company, once all assets are sold and liabilities paid off.

Statement of Financial Performance

This is more commonly referred to as a Profit & Loss Statement, or Income Statement, and details how much money the company made or lost during the year.

The Statement of Financial Performance reflects how much money the company has made or lost over a period of time, usually 6 or 12 months.

The statement is broken up into two parts; Income (sales and other revenue) and Expenses (costs).

This statement provides a range of information such as the value of sales during the period, other income such as bank interest, staff costs, marketing costs, research costs, and interest paid to the bank.

The final figure at the bottom of the statement represents the company’s profit or loss for the year (or period).

Statement of Cash Flows

This is more commonly referred to as a Cash Flow Statement, and details cash flowing in and out of the company.

The Statement of Cash Flows reflects where the company is generating or leaking cash over a period of time, usually 6 or 12 months.

The statement breaks cash flows into three parts; Operations (normal business activities), Investing (buying and selling of assets) and Financing (mostly loans and interest).

Many beginners confuse this statement with the Statement of Financial Performance, but they are quite different.

A clear is example is when a company buys a new piece of machinery. The company has not made or lost any money, but the transaction meant cash changed hands.

This statement provides a range of information such as money received from customers, money paid to suppliers, money paid to buy equipment, money received from selling assets, and money received or repaid to the bank.

The final figure at the bottom of the statement represents the company’s bank balance at the end of the year (or period), and how much it changed over the period.