Company financial reporting: The basics
Every six months, UK listed companies are required to update the market on their financial performance.
There are some relatively tight restrictions around what these reports have to contain. That’s a good thing for investors, because it means that with every set of financial reports we read, we can expect the same set of items:
An income statement
A cash flow statement
A balance sheet
A strategic report from senior management
Numbers which are consistent with IFRS or UK GAAP accounting standards (which means they’re comparable with older numbers or numbers from other companies)
History of financial reporting
The history geeks among us might be interested to know that accounting standards are a relatively new development for London listed companies.
While the London Stock Exchange can trace its history back to the early 19th Century and it has played host to major conglomerates since the industrial revolution, accounting standards were only adopted in the 1960s.
Before then, investors had to accept the premise of a ‘gentlemen’s agreement’, which meant company performance information was revealed relatively sporadically and was never properly comparable.
Now, just because there are accounting standards to which companies must adhere, it is worth noting that there will be the odd executive who aims to flatter the numbers in their report. The hope being that fluffy language and heavy adjustments can disguise any hiccups.
That’s why, when you’re reading financial results, it’s always best to start by looking at the cold hard numbers. That way you can form your own opinion of the business and its recent performance without being swayed by the management jargon.
Translating company results (a light-hearted take)
Non-recurring costs = recurring costs we wished didn’t keep happening
Exceptional costs = costs associated with previous mistakes, especially if they can be blamed on former management.
One-off costs = One of many costs that make the results look better if we ignore them
Careful cost management = only the board received a bonus this year
Customer acquisition costs = discounting
Margin erosion = discounting
Investing in our customer proposition = discounting
Becoming price-competitive = discounting
Promotional activity = discounting
The following is a list of the most important metrics you can find in the income statement, cash flow statement and balance sheet.
Income statement: A summary of the revenues and expenses of a company in a given period
Revenue: A company's sales - literally how much money it collects from its customers by selling its goods or services
Gross profit: Profits after the cost of sales (how much it costs to produce the product or service) has been subtracted from revenue
Operating Profit: Profits after all the day-to-day costs of running the business have been subtracted from revenue
Operating margin: A measure of profitability which compares operating profit with revenue, calculated by dividing operating profit with revenue
Pre-tax profit: A company's profit after all costs, excluding tax, have been subtracted from revenue
Net profit: Profit after all costs have been subtracted from revenue
Earnings per share: The value of the company's profits per share, calculated by dividing the net profits by the number of shares in issue
Balance sheet: A statement of the assets, liabilities and capital of a company
Current assets: Company assets that can be liquidated (turned into cash) within a year
Cash and cash equivalents: Anything that can be immediately turned into cash
Net receivables: Good or services that have been sold (and recognised as revenue), but the company hasn’t yet received the cash for
Inventory: Stock that the company holds for sale to its customers
Non-current assets: Company assets that can’t be liquidated (and their value released) in a short space of time
Property plant and equipment: Physical property that contributes to the ongoing health of the business, including land, buildings, factories and machinery
Intangible assets: Items of value which can’t be identified by anything physical, such as branding or intellectual property
Goodwill: An intangible asset associated with brands - if nothing else existed, how much is the brand worth
Current liabilities: Company liabilities which are due within a year
Net payables: Things that have bought but not yet paid for
Short term debt: Debt that is due to be paid back within a year
Non-current liabilities: Liabilities that are due to be paid back over the long-term
Long term debt: Debt that is not due to be paid back within a year
Total equity: The value of assets once all liabilities have been taken away. It represents the value of the business that ordinary shareholders have a claim to.
Cash flow statement: Total cash flowing through a company in a given period
Cash from operating activities: Cash generated from the operations of a company
Capital Expenditure: The sum of purchases of fixed assets, intangible assets and development costs
Free cash flow: Surplus cash generated by a firm's operations after tax, interest and capital expenditure
Frequently asked questions
When can I expect a company to issue its results?
There are two main reporting windows in the UK. These tend to come in February and August. Companies are not obliged to warn investors when their results will be coming, but some of them chose to do so via their own financial calendar.
In general, investors can expect financial results at roughly the same time every year, so if you look back at last year’s numbers, you’ll get a good sense of when the next ones will be coming out.
What period of time do company financial results cover?
Interim results cover the first six months of the company’s financial year and annual results cover the whole year.
When is a financial year?
Each company can run a financial year whenever it chooses. Most tend to align their financial years with the calendar year. Those are the ones which report annual results for the year to December around February and interim results for the six months to June around August.
What is the difference between interim results and annual results?
Interim results cover the first six months of the financial year. They are not required to be audited by an official accounting firm, but they do need to comply with accounting standards. Annual results are issued as soon as reasonably possible after the company’s financial year ends and they’re audited by the company’s external accountants.
How about annual reports?
Annual reports are far more detailed, normally downloadable coverage of the company’s position, including all the details of the previous financial year and more information about the outlook and strategy. You’ll also find more detail from the company’s board and its remuneration policies.