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What information in the company's annual audit report is of particular interest to banks or investors?
Hello friends, I wish you all a happy New Year in 2024. This time I would like to share with you how banks/investors read the financial report Audit Report (physical examination report) so that they can roughly know how it can affect the parties' ability to stand out.
1. Profitability
In general response reports, basic disclosed data such as past sales, gross profit and net profit, etc. This data will be used to compare with similar company standards in the market. If it is found in the comparison that some performance is relatively better than that of the general peers, we will dig deeper into the source. For example, the company's gross profit margin is better than that of its peers. The reason is that it has higher pricing (price increase) ability because it is accompanied by the company's long-term brand building effect. At the same time, it also enjoys the ability to negotiate with suppliers because of the large order volume and the small difference in the services provided by the suppliers.
In addition, the company's ability to make money must take into account its ability to repay receivables and uncollected accounts and its inventory operation capabilities. These two points have become especially important since current accounting standards require financial statements to more closely reflect current market fair value. For some companies with longer trade cycles and credit terms, overdue receivables or slow inventory are more likely to occur, which will lead to the inclusion of bad and bad debts or asset impairment on the financial statements, indirectly damaging the company's profits.
Then comes the financing cost. Under the current high interest rate situation, corporate financing is set at borrowing interest rates such as P or H+ (that is, about 6% or up). In particular, we have customer cases where refinancing at higher borrowing costs is required because old debts are not paid off. This approach will undoubtedly reduce the company's net profit a lot.
2. Company Assets (Resources)
Unexpected events can happen at any time. If a company's expected profits are not as good as expected, whether the reason is that the company's own resistance has deteriorated or that it is facing external environmental factors such as natural disasters or epidemics, it is very good if the company still has enough food and medical supplies to protect itself.
But not all resources are of the same grade. Cash is certainly at the top of the list, especially when bank time deposit interest rates are so high, it is definitely one of the first choices for stable assets. Secondly, it is also good if the company holds properties. Even if property prices are currently falling, banks in Hong Kong still have a sentimental interest in the buildings. However, they must also consider questions such as: Is the property in question for self-use/rent? If it is rented out, what is the monthly rent received and the length of the lease signed? Is the current status of the property still being paid/off?
Of course, the resources held by the company must be determined by how many of them belong to itself/others. If the audit report reveals that most of the resources are borrowed from outside (liabilities), and if the relevant liabilities are mostly short-term liabilities (one year or less), it will undoubtedly be greatly discounted! Because it means that the company will soon need to use funds to flow out.
In addition, banks and investors will pay attention to the company's capital structure and financial health. For example, what is the company's capital structure (ie, the ratio of equity to debt)? If there is too much debt, it may increase the company's risk level and repayment pressure. In terms of financial health, banks and investors will pay attention to the company's current ratio and quick ratio. The current ratio measures whether the company has enough liquidity to meet short-term debts, while the quick ratio excludes the impact of inventory and focuses more on whether the company has enough cash and short-term investments to meet short-term debts.
In addition to the above assets and liabilities, banks and investors will also pay attention to the company's cash flow status. Cash flow is the lifeline of a company, affecting its operating activities and ability to repay debt. Banks and investors monitor cash inflows and outflows from a company's operating activities to ensure that the company has enough cash to continue operating and repay debt.
Finally, banks and investors will also pay attention to the company's risk management measures and internal control systems. Risk management measures include the company's risk assessment and control measures, such as the assessment and management of market risk, credit risk and legal risk. Internal control systems refer to a company's internal monitoring and management mechanisms to ensure that the company's assets are properly protected and to reduce the risk of fraud and errors.
In summary, banks and investors pay special attention to a company's profitability, asset profile, capital structure, financial health, cash flow, risk management measures and internal control systems. By reviewing audit reports, banks and investors can obtain relevant information, evaluate the company's operating conditions and risk levels, and make investment or loan decisions. This time I have shared it with you to this extent, and I will share it with you next time! --------------------------
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