Short Class Analyzing Financial Report | MySkill

Analyzing Financial Reports

The class explains how to read and analyze company financial statements to assess a company’s financial position, performance, risks, and possible future direction. The instructor emphasizes using multiple periods and methods—not just net profit or a single ratio—and treating conclusions as estimates rather than certainties.

Financial Statements and Users

The five statements discussed are:

• Statement of financial position (balance sheet): Shows assets, liabilities, and equity at a point in time. Total assets should equal total liabilities plus equity.
• Cash flow statement: Shows cash inflows and outflows from operating, investing, and financing activities.
• Income statement (profit and loss): Shows revenue, cost of goods sold (COGS), expenses, and profit or loss for a period.
• Statement of changes in equity: Shows movements in capital, retained earnings, additional investment, and distributions such as dividends.
• Notes to the financial statements: Provide explanations and details that help interpret the other statements, including significant events or changes that may affect reported results.

The statements are linked: net income flows into the statement of changes in equity; ending equity appears in the statement of financial position; and the change in cash should reconcile with net cash flow.

Users include owners, management, employees, creditors, investors, auditors, regulators, and the Indonesia Stock Exchange (IDX). They use financial statements to assess creditworthiness, investment prospects, company performance, and eligibility for public listing. The lecture identifies the Directorate General of Taxes (DGT), the Financial Services Authority (OJK), and IDX as relevant regulatory or market institutions.

Analysis Framework and Methods

Financial-report analysis evaluates a company’s current and past financial position and operating results to make reasoned estimates about its future condition and performance. Its objectives include:

• Forecasting: Using historical results and trends to inform expectations and planning.
• Understanding: Assessing the company’s business, sector, activities, and overall financial condition.
• Screening: Comparing companies or opportunities against investment criteria, often using ratios.
• Diagnosis: Identifying potential issues, such as unusually rising or falling expenses.
• Evaluation: Assessing performance and informing management decisions.

The recommended approach is to:

1. Define the purpose of the analysis and select the relevant statements.
2. Review multiple periods rather than relying on a single year. The instructor says forecasting may require five to nine years of historical data.
3. Combine trend, common-size, and ratio analysis where appropriate; using only one method may provide an incomplete view.
4. Interpret the figures in context. Financial analysis involves judgment, not just calculation.

Horizontal Analysis

Horizontal analysis compares the same accounts across periods to identify growth or decline. In the class example, sales rise 3% from 2021 to 2022 and a further 6% in 2023. COGS falls 5% in 2022 but rises in 2023. The example also discusses how higher general and administrative expenses affect net income. These figures are illustrative.

Vertical or Common-Size Analysis

Vertical analysis compares accounts within one period. An account may be expressed as a share of total assets, or expenses and profit as a share of net sales. In the 2023 example, current assets are 35% and fixed assets 65% of total assets. The instructor suggests considering whether that composition suits the company’s business and liquidity needs.

Trend and Index Analysis

Trend and index analysis can make longer time series easier to compare. In the example, 2019 net profit of Rp200 million is the base year, indexed to 100. A later result of Rp220 million would have an index of 110.

Financial Ratios Discussed

• Liquidity: The current ratio, calculated as current assets ÷ current liabilities, assesses the ability to meet short-term obligations. The instructor says a higher current ratio is generally better.
• Solvency: Debt-to-assets and debt-to-equity ratios assess long-term debt capacity. The instructor says lower solvency ratios generally indicate less debt risk.
• Profitability: Includes net profit margin, which measures net profit relative to sales.
• Activity and turnover: Assess how efficiently assets are used to generate revenue, including receivables and inventory turnover.

Accounting and Risk Considerations

• Profit is not the same as cash flow. Under accrual accounting, revenue may be recognized when a company has fulfilled its obligation and invoiced a customer, even if cash has not yet been received. The amount may initially be recorded as a receivable.
• A balanced trial balance does not guarantee correct financial statements. Errors in amounts or account classification can distort reported results and analysis. For example, recording salary expense as COGS can affect gross profit.
• Commercial profit may differ from taxable fiscal profit. Companies may need fiscal adjustments because tax rules can treat certain income or expenses differently. The exact treatment depends on applicable rules.
• Review the notes to the financial statements for explanations of material movements. For example, revenue may decline after a major customer or contract is lost.
• Check cash flow against the change in cash between reporting periods.

Assets, Sectors, Instruments, and Disclosures

The class does not discuss publicly traded tickers, ETFs, bonds, commodities, cryptocurrencies, or specific investment instruments. It refers generally to company equity, investments, loans, and shares, and mentions property and construction companies as examples when discussing asset composition.

No explicit “not financial advice” disclaimer is given. The material is presented as accounting and financial-analysis education.

Presenters and Sources

• Serina: Moderator.
• Retno Nogiani: Finance, accounting, and tax reporting specialist; main instructor.
• Dwi Prastowo Darminto: Source cited for a definition of financial-report analysis.