5 Tips for reading financial statements

The annual accounts are more than just a ‘must’. It provides a lot of insight into the financial situation of a company. Because reading annual accounts is not self-evident for everyone, I hereby present several clevernesses with which you can see for yourself how a company is doing financially. Do the math and immerse yourself in the world of financial reporting. 

Openness creates trust 

In the current crisis of confidence, companies are not in advance of good faith. They want insight and want to know how a company is doing financially before doing business with it. Bills must be paid on time and business partner reliability is essential. Good cooperation and trust are created with openness and transparency. Ultimately, this leads to more business, more opportunities, and fewer risks.

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Annual accounts provide insight into the financial situation of a company. They are an important source for estimating (the debtor) risks. Every day, thousands of companies view the financial statements of another company through a credit reporting agency to determine how and under what conditions they want to do business.

Tip 1

Calculate the sum of the ‘equity capital’ and the ‘working capital’. If the outcome is negative, be wary, and ask for additional security.

Tip 2

Calculate the ‘current ratio’. You calculate this using the following formula: ‘current assets’ divided by ‘short-term loan capital’. If the outcome is lower than 1, pay close attention. This means that the company cannot properly meet its short-term obligations, including you as a supplier. A healthy outcome is in any case higher than 1. You can consider 1.5 to 2 as ‘healthy’.

Tip 3

Calculate the ‘quick ratio’. You calculate this in the following way: the current assets minus the stocks and that divided by the short-term loan capital. If the outcome is lower than 1, be wary again. Again, this means that the company cannot properly meet its short-term obligations. Stocks are not included in the quick ratio, because they must first be converted into money. That does not always work. It is also possible that the stock is sold for a lower amount than what is stated on the balance sheet.

Tip 4

You need at least three annual accounts to make a good analysis of the company. Pay attention to the development of equity capital. If it increases, then profit has probably been made and added to equity. The same applies to the development of the ‘reserves’.

Tip 5

Calculate the ‘working capital’. You calculate this as follows: current assets minus short-term loan capital. Formally, working capital is the amount that is left over after repayment of the short-term loan capital. In practice, the working capital is the capital that the company can freely dispose of for the performance of the corporate task. So positive working capital means that there is money to pay you.

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