Reading between the numbers

Certified Public Accountant  Frederick Kibbedi.

What you need to know:

Mastering the key financial indicators  helps shareholders to harness investment opportunities and minimise risks.

In today’s fast-paced business scene, dependable financial reporting is vital, especially using International Financial Reporting Standards (IFRS) for consistency and transparency worldwide. This standardisation is key for cross-border operations and investor trust, as seen with MTN Uganda’s IFRS-compliant reports attracting global investors.

Understanding IFRS involves focusing on key aspects of financial statements. The balance sheet details a company’s assets, liabilities, and equity at a specific time, indicating shareholder’s residual interest. 

The income statement compares revenue with expenses, with profitable entities such as Safaricom showing steady revenue increases and managed expenses, signaling good prospects for investors.

The Auditor’s  opinion
An aspect often overlooked by non-accountants is the auditor’s opinion. This is where an independent auditor examines the financial statements to ascertain their accuracy and compliance with IFRS. A ‘clean’ or ‘unqualified’ opinion means the financial statements present a true and fair view of the company’s financial position. This is a green light for stakeholders, indicating reliability and adherence to high reporting standards.

Listed and non-listed entities
Consider the contrast between a listed entity and a non-listed entity in Uganda. While both adhere to IFRS, the listed entity faces stricter scrutiny and higher expectations for transparency from regulators and the public. This means their financial statements are often more detailed.

Maximising benefit 
IFRS interpretation empowers stakeholders in East Africa with informed decision-making, enhancing understanding of local economic dynamics. Familiarity with IFRS-compliant financial statements provides insights into a company’s performance and prospects, fostering an engaged financial community. The following tips can be very helpful;

Revenue growth: The pace setter
Revenue growth is the increase (or decrease) in a company’s sales over a period. Consistent revenue growth is often a hallmark of a performing company. 
It indicates an expanding business, possibly due to market dominance, product innovation, or effective marketing strategies. For a shareholder, steady revenue growth can signal the company’s robust market position and potential for long-term profitability.

Equity growth
Equity growth refers to the increase in the owners’ stake in a company over time. This can result from retained earnings or additional investments by shareholders. 

A steadily growing equity suggests a company is using its profits and investments to enhance shareholder value. For stakeholders, this is a positive sign, indicating the company’s ability to generate wealth for its owners.

Profitability, measured by net income, is the surplus after all expenses are deducted from revenue. A consistently profitable company is often considered a safe bet for investors. For shareholders, profitability not only implies potential dividend payouts but also a company’s capability to reinvest in growth and withstand economic downturns.

Dividend policy: sharing success
The dividend policy of a company indicates how it distributes profits to shareholders. A company with a stable or increasing dividend payout is often viewed favourably. 

It suggests not only current profitability but also management’s confidence in future earnings. For shareholders, dividends are a direct benefit and a source of regular income.

Gearing ratios:  leverage and risk
Gearing ratios, such as the debt-to-equity ratio, measure a company’s financial leverage. High gearing means a company is using more debt compared to equity to finance its operations.

While some leverage can enhance returns on equity, excessive debt can signal high risk, especially in uncertain economic times. Shareholders need to assess whether the company’s leverage aligns with their risk tolerance.

Going concern: future prospects
The going concern principle assumes a company will continue its operations in the foreseeable future. Auditors assess this when reviewing financial statements. 

If doubts about going concern arise, these could indicate severe financial distress. Shareholders should be cautious, as it might affect the company’s ability to maintain operations, meet obligations, and protect investments.

The cash reality
The statement of cash flows shows how a company generates and uses cash. Positive cash flow from operations is a good indicator of a company’s health, as it means the business is generating enough cash to sustain itself. For shareholders, understanding cash flows reveals the company’s true cash position, often obscured in profit figures due to non-cash accounting adjustments.

This article guides shareholders and finance professionals in East Africa in understanding financial reporting and analysis. It focuses on key concepts such as revenue growth, equity growth, profitability, dividend policy, gearing ratios, going concern assumption, and cash flow statements. 
These indicators expose a company’s current health and future potential. This understanding helps stakeholders harness investment opportunities, minimise risks, and contribute to East Africa’s growing economy. Financial literacy becomes vital for navigating modern business environments.

Frederick Kibbedi is the president of  Institute of Certified Public Accountants of Uganda.