As a former general manager of Freeview and current chief financial officer of Image Centre Group, Steve Browning knows how to crunch any number that comes his way, and even a few that don't. Here's how to read your competition's financial statements.
Step 1: Go to www.business.govt.nz
Step 2: Look up your competitor’s company using the search engine
Step 3: Go to ‘Documents’ and look for ‘Financial Statements’ (most overseas companies are required to file financials, but not if they are New Zealand owned)
Operating profits tell you if the business operations are profitable and so excludes financing and investing costs. Sometimes quoted as EBITDA (earnings before interest, tax, depreciation and amortisation) but in these accounts depreciation and amortisation have been included above the operating profit line. You may be considering investing in the sector or buying this specific business and its cash flows from operations is the best indicator of value creation.
Gross earnings gives you a feel for the scale of the operation. Often easier to find top line results for competitors than profit (or bottom line) results and can give you a sense of market share.
The net profit of the business is after all costs have been taken into account. This is the number that gets added (or if a loss, subtracted) each year from the shareholders’ equity in the business as shown on the balance sheet.
How much debt is the company carrying? Based on current earnings, how long would it take to pay the debt off? At these debt levels can the business generate enough cash to pay the interest costs and still deliver a profit? All questions worth asking.
Current assets are the liquid (easy to turn into cash) assets of the business while current liabilities are the outgoings payable within 12 months. A simple test of the viability of a business is to net off current assets and current liabilities. For some businesses you may want to exclude inventory from this test as it may not be easily converted into cash.
Check for intangible assets like goodwill, the value of an entity over and above the value of its assets. When you see it on a balance sheet it usually means the company was purchased for more than the value of its tangible assets and the intangible value is carried as goodwill.
Cash and cash equivalents. Particularly in the current economic climate when raising debt finance is difficult, there’s no truer phrase than ‘cash is king’. It’s worth checking if there’s money in the bank as a buffer from any short-term market or performance shocks.