Xenia Xtra Series: Point 4 - Always read the notes in a financial statement
When carrying out a financial analysis, numbers are clearly the key component. And yet they can only go so far. Here, Roberto Simone, risk development executive at Xenia, explains the importance of always reading the notes in a financial statement.
The main objective of any financial analysis is to observe trends, changes and variances in the numbers.
Look a little deeper, however, and your extra effort will often be rewarded.
I am referring to the accompanying notes in a financial statement, which often carry vital operational information that is not apparent from, or included, in the statement itself.
These notes are arguably as important as the numbers in the main statement, because they can provide the context needed for a fair presentation of a financial position.
In fact, has it ever been as important to analyse such notes?
Businesses face unavoidable disruption
I ask this because in 2022, disruption is the day-to-day reality for most companies. They are exposed to an increasingly complex - and unavoidable - set of financial risks. Where there is geopolitical instability, there is also supply chain disruption. Where there is exchange rate volatility, there are also ever more challenging international trade barriers.
That means it’s essential critical thinking and evaluation are employed like never before when making decisions.
Analysing the accompanying notes can provide the granular detail about performance, key metrics and movement of assets, which in any credit evaluation are essential and critical areas to observe. They can also explain the rationale behind a major change, or anomalies like exceptional costs.
Careful monitoring of credit risk lies at the heart of the evaluation process, and requires all avenues of assessment to gain perspective that the “shop window” is unable to communicate.
Reading the notes is simple but essential credit risk practice
Regardless of the size of a business, notes (where provided) offer a further platform towards understanding not only what a company is doing or has done - but where it is heading. This is an essential tool in determining the credit risk of any business.
A fully managed process - including an analysis of the notes - will ensure reliability, certainty and quality.
In analogical terms it’s like joining the dots or completing a puzzle. Without referring to the notes you run the risk of completing the image incorrectly, or missing a vital piece to the equation.
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Risk Development Executive