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A Comprehensive Guide to Analysing Financial Reports for Stock Investment

Investing in the stock market can be daunting, especially when deciding which analysis method to use. In this blog post, we’ll delve into fundamental analysis, a proven technique used by legendary investors like Warren Buffett, Charlie Munger, and Lo Kheng Hong. Fundamental analysis focuses on dissecting financial reports to understand a company’s performance, management quality, and overall value.

This step-by-step guide will help you navigate through annual reports and financial statements, highlighting the most critical points to consider before investing.

Highlights

  • 📈 The fundamental analysis method is used by legendary investors.
  • 📊 Financial reports are a verified source of data for analysis.
  • 🏢 It is important to know the company’s profile and management.
  • 📉 Check the factors that affect the business industry being invested in.
  • 🔍 Pay attention to who the auditor is and the audit opinion on the financial reports.
  • 💰 Analyse the income statement to understand the company’s performance.
  • 📅 Check the company’s liquidity to assess its ability to meet obligations.

Key Insights

  • 🌟 Fundamental Analysis: This method has proven effective in creating successful investors. Understanding fundamental analysis is an important first step to investing wisely.
  • 📝 Financial Reports: As a verified source of data, financial reports provide in-depth information about a company’s financial health, but they need to be read critically.
  • 🏛️ Company Profile: Understanding the history and management structure is important to assess investment potential and risks. Competent management is an indicator of a good company.
  • 🧩 External and Internal Factors: Each industry has unique factors that affect performance, so investors need to study the industry context in depth.
  • 🔍 Auditor’s Opinion: Knowing who the auditor is and the type of opinion given is important to assess the credibility of the financial reports. A good opinion indicates transparency.
  • 📊 Revenue vs. Cash Flow: Examining the quality of revenue and cash flow provides a more accurate picture of the company’s financial performance.
  • 💧 Liquidity: Ensuring the company has sufficient liquidity to meet short-term obligations is key to the sustainability of the investment.

Understanding Fundamental Analysis

At its core, fundamental analysis is about identifying companies with:

  • Strong business models.
  • Competent management.
  • Fairly priced or undervalued stocks.

The primary data source for this analysis is the company’s annual report and audited financial statements. These documents are comprehensive, verified by public accountants, and provide the most reliable insight into a company’s operations. However, due to their formal and extensive nature, it can be challenging to know where to start.

Key Points to Examine in Financial Reports

We’ve broken down the analysis into eight essential points to simplify the process:

A. Company Profile and Business Model

Before investing, understand the company’s history, business operations, and leadership team. Look for:

  • Business history: For instance, SIDO Muncul began as a home-based business in 1930 and has diversified its operations.
  • Leadership quality: Check the credentials and reputation of board members, directors, and shareholders.

This information is often available in the company profile section of the annual report.

B. Industry and Economic Factors

Evaluate external and internal factors that impact the company’s industry, such as:

  • Market trends.
  • Interest rates.
  • Regional developments.

For example, a property business is influenced by land prices, interest rates, and urban development. This information is generally found in the Management Discussion and Analysis section.

C. Auditor and Audit Opinion

Examine who audited the financial statements and their opinion. Reputable auditors include PwC, EY, and KPMG. Audit opinions fall into four categories:

  1. Unqualified Opinion: Best rating, indicates compliance with accounting standards.
  2. Qualified Opinion: Some issues exist but are not critical.
  3. Adverse Opinion: Major non-compliance with standards.
  4. Disclaimer of Opinion: Auditor lacks sufficient evidence for an opinion.

D. Profit and Loss Statement

Analyse the income statement to check:

  • Profitability: Compare this year’s profit with previous years.
  • Profit margin: Higher margins indicate efficient management.

Visualised data, such as charts in investment apps like Ajaib, can simplify understanding.

E. Revenue and Expense Sources

Investigate whether revenue comes from core business activities or one-off sources like asset sales. For example, in 2018, a company reported high profits due to contractual income rather than operational performance.

F. Business Partners

Identify business partners and check if transactions are genuine or manipulated within affiliated companies. A 2017 case revealed sales recorded as external but were made within the same ownership group.

G. Revenue Quality

Large-scale businesses often generate revenue on a credit basis. Verify that operational profit aligns with cash flow from operations, as discrepancies can indicate potential issues.

H. Liquidity

Liquidity measures a company’s ability to meet short-term obligations. Use the current ratio: current_ratio = current_assets / current_liabilities

A ratio above 1 indicates sufficient liquidity to cover short-term debts.

3. Practical Tips for Analysing Financial Reports

  • Download Reports: Use tools like Ajaib’s calendar feature to access financial reports.
  • Start with Key Sections: Focus on profiles, auditor opinions, and financial highlights first.
  • Cross-Verify Data: Supplement company data with independent sources for balanced insights.

Final Thoughts

Analysing financial reports may seem overwhelming initially, but by breaking it down into these eight points, you’ll gain clarity on a company’s true financial health. Remember, while this process is essential for making informed decisions, no single method guarantees success. Diversify your strategies and keep learning.

Stay tuned for more tips and tools to enhance your investment journey! If you found this guide helpful, share it with fellow investors. Happy investing!

source: 8 Hal Penting Ketika Baca Laporan Keuangan | Analisis Fundamental Saham