Understanding a company’s financial results: a beginner’s guide
A company’s financial results tell its story in figures. Before investing, you need to understand three key documents: turnover, profit and the balance sheet. This article shows you how to read them without any hassle.
🎯 What you’ll learn
- Identify the three key financial documents to consult
- Understanding the difference between turnover and profit
- Interpreting a simplified company balance sheet
- Spotting warning signs in the results
- Finding out where to find this official information
What is it all about? The three documents you need to know about
Every publicly listed company must publish its financial results on a regular basis. These are official documents that show whether the company is making a profit, how much it is spending and what it owns. You will find three key documents: the profit and loss account (which shows profits and losses), the balance sheet (which lists what the company owns and what it owes) and the cash flow statement (which tracks money coming in and going out).
These documents are usually published once a quarter (every three months) and once a year. They are free of charge and available on the company’s website or on specialist websites. This is your first step before investing: reading these figures will help you understand the company’s true financial health.
How to read the profit and loss account: turnover and profit
The profit and loss account is the easiest document to understand. It looks like an invoice: at the top, what the company has earned (turnover, i.e. all sales); at the bottom, what it has spent (wages, raw materials, rent, etc.); and finally, what is left: the profit (or loss).
Let’s take a simple example: a company sells €100 million worth of products in a year. That is its turnover. It spends €60 million on manufacturing, €20 million on wages and €10 million on tax. Total expenditure: 90 million. That leaves 10 million: this is the net profit (the actual profit, after all).
Please note: a high turnover does not necessarily mean that the company is making a lot of money. A company may sell a lot but spend even more. It is the profit that really counts.
Understanding the balance sheet: what the company owns and what it owes
The balance sheet is a snapshot of the financial position at a given point in time. It answers a simple question: if the business were to close down tomorrow, what would be left? On the left: assets (everything the business owns: buildings, machinery, money in the bank). On the right: liabilities (everything the business owes: bank loans, wages payable).
The difference between assets and liabilities is known as equity. This represents the company’s true wealth. The greater this difference, the more financially sound the company is. If liabilities exceed assets, the company is in difficulty.
Warning signs to look out for
Before investing, ask yourself these questions: Are profits rising or falling year on year? Is the company taking on more and more debt? Are its cash reserves dwindling rapidly? If the answer to these questions is ‘yes’, that’s a warning sign. It doesn’t mean you shouldn’t invest, but that you need to understand why.
Always look at at least two or three years’ results to see the trend. A bad year may be a one-off; a negative trend over three years is more worrying.
📖 Definitions
- Turnover
- The total amount of money the company earns from selling its products or services, before deducting expenses.
- Net profit
- Money remaining with the company after it has paid all its expenses, taxes and social security contributions. This is the actual profit.
- Summary
- A document showing what a company owns (assets) and what it owes (liabilities) on a given date.
- Assets
- Everything the company owns that has value: money in the bank, buildings, machinery, stock of goods.
- Liabilities
- Everything the company has to pay: bank loans, wages to be paid, debts to suppliers.
💡 A practical example
Let’s imagine a company called ‘TechPro’. In 2023, it generated 50 million euros in turnover. It spent 35 million on everything (production, wages, rent). Result: a profit of 15 million. Its balance sheet shows that it has 80 million euros in assets (factories, cash) and owes 30 million (loans). Its equity is therefore 50 million. The following year, turnover rose to 55 million but profit fell to 12 million: be careful, as expenditure is rising faster than sales.
⚠️ Risks you need to be aware of
- Past performance is no guarantee of future results: a good year does not mean that the company will continue to perform well.
- Companies can legally manipulate their results using complex accounting techniques: always check the figures over several years.
- High profits can mask a difficult cash flow situation: the actual cash does not always come in when the results suggest it will.
- Different sectors have different standards: it makes more sense to compare two companies within the same sector than to compare them across different sectors.
✅ Key points to remember
- Three key documents to read: the profit and loss account (gains and losses), the balance sheet (what we own and what we owe) and the cash flow statement (actual cash).
- Turnover alone is not enough: it is profit that shows whether the company is actually making money.
- Always look at several years’ worth of results to see the trend, not just a single year on its own.
- Warning signs: falling profits, rising debt, and rapidly dwindling bank balances.
- These documents are free and publicly available: you can find them on the company’s website or on specialist financial websites.
🧠 Test your knowledge
1. What is the difference between turnover and profit?
Turnover measures total gross sales. Net profit is what remains after all expenses, taxes and charges have been paid. A company may have a high turnover but little profit if its expenses are very high.
2. You notice that a company’s profits have been falling for the past two years. What should you do?
A fall in profits warrants investigation. It may be due to a temporary investment strategy, an industry-wide crisis, or a genuine problem. You need to understand the cause before making a decision. Always analyse the figures over several years to distinguish a one-off event from a trend.
Fancy taking it a step further?
Analysise this security in detail on Baziloo — B-Score, risk metrics, price history — and track it in your portfolio.
Sources
- AMF — Investor Zone (Autorité des marchés financiers) — amf-france.org
See also
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