If you invest in shares in the Australian Stock Market you will receive the Annual Report of your company around this time.

Most investors read parts of the report mainly the Chairman Report, the Chief Executive Officer’s Report and the Financial Highlights section of the Annual Report but few spend little or no time reviewing the financial statements of the company.

The purpose of this article is to highlight six fundamental areas that you should pay attention to from an investor’s perspective.

Let’s first look at the consolidated income statement.

1. Did the operating income increased from last year. Generally we would want this figure to increase, at least by CPI. If not, what reasons do the directors give for this decline in revenue.

2. Similar to point 1 above, did the profit after income tax increase during the year. If not, again, why not?

If we refer to the Balance Sheet we should note the following:

3. Net Assets. Does the company have ‘net assets’. This means that the accounting value of the assets exceeds the company’s liabilities.

4. Do the current assets exceed the current liabilities. This is a general indicator of solvency. You do not want the company’s current liabilities to exceed the company’s current assets or it may incur problems paying its bills when they fall due.

If we refer to a third report the ‘Statement of Cash Flow’

5. Has there been an increase in the net cash and cash equivalents during the year. This should be positive we want the business to generate positive cashflow.

6. What was the net cashflow from operating activities. This again should be positive. We want the operating side of the business generating more cash than it is spending.

The purpose of this article is not to be too analytical. I was requested to submit this article for non accountants particularly mum and dad investors.

By reviewing these six areas in the Annual Financial Report it should become clear which companies you avoid, buy, hold or sell.

Should you require any information on the analysis of financial statements please contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.

The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.  It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.