Understanding Financial Report – Part I

After knowing that consumer sector is the largest driver of economy in my previous post, the next step is to pick which company to go. We will focus on publicly listed company since they have to provide their financial report periodically to Indonesian Stock Exchange (IDX). The full list is available in here and it is updated daily if there are new additions or removals. We only need to select Consumer Goods as the sector for now. There are three parts of financial report namely Asset Liabilities, Profit Loss and Cash Flow. This post will focus on Asset Liabilities first. The other will come after. Read on for more details on this.

Before we start to dig in, we need to narrow down the company selection. As a general rule, we can pick companies with big market capitalization. This number comes from stock price multiplied by number of shares. Fortunately, we don’t need to calculate this since there are many sites already provide it. One of them is Indopremier and I use it to invest. We can go to this link and input those in Consumer sector with market cap more than IDR 10 Trillion. Reason is simply because we want to pick popular companies and not risking our money to those who just go public.

As of this writing time, there are 10 companies in this sector. And I strongly suggest not to pick tobacco and alcohol companies as I personally think they do more harm than good (well, as a Moslem we are not allowed to drink alcohol anyway). Removing those, we will have these companies to pick (sorted by market cap value in IDR Trillion):

1. UNVR (Unilever)
2. ICBP (Indofood Consumer Brand Products)
3. KLBF (Kalbe Farma)
4. INDF (Indofood, parent company of ICBP)
5. MYOR (Mayora)
6. ULTJ (Ultra Jaya)
7. SIDO (Sido Muncul)

Now, the other concept we need to understand is although you will find many metrics out there, but actually we need to compare companies in their industries and products. So in this case, we need to compare ICBP, MYOR and ULTJ since they produce snacks and beverages. UNVR focused on personal care product like deodorant, toothpaste, shampoo and detergent. KLBF is a pharma company so they create medicine. SIDO mostly creates traditional herbal drinks.

Next, we want to focus on the first financial report called Balance Sheet. We can get the last 3 years in IDX by using this link. But if we need to get the older data, we need to go to each company websites under Investor Relation section. There are several files in there but there will be two files (PDF and Excel) with format FinancialStatement-[quarter]-[year]-. These files are good for start but not comprehensive enough. To get more details we need to use the other PDF file but we will need that on the next part.

Cash Portion

If you don't want to download the files, the other option is to use Reuters website, put the company name in the search bar and go to Balance Sheet section (this will show Asset Liabilities) and select Annual view. What we need to focus on this report is the Cash proportion from the Total Assets. This is important since we can imagine this as how much gas left in our car so we can measure how far we can go without any additional gas. Company with relatively good proportion can survive unexpected events like pandemic. I write this in June 2020 when the global economy is affected by COVID-19 so only companies with decent Cash proportion can still pay their liabilities (employee salary, suppliers, and so on) without needing to cut their employee. In some companies, the top management can take big cut during this year, some even don't get paid to ensure their company survive. There is a good analysis from McKinsey about this if you want to read further.

Liquid Assets

Other important number from here is Current Assets and Current Liabilities. The first one will show liquidity (Cash included) and the second one measures what company owed in the short term (less than 1 year). Again, if the ratio is more than 1 it implies that the company can pay its short term obligation (debt, account payable, etc) in ease. Ideally we want to check in annual view to get a glimpse of the trend. From my personal view, any changes below 5% will show that there are no significant changes so we can still have our first conclusion. This is because from statistics, we can put a threshold of 1%, 5% or even 10% (although it's a bit rare) as our p-value to determine whether a changes is significant or not.

I think that will conclude this post for now. Your homework is to compare those companies and determine which one has better Balance Sheet position. See you in the next post!

P.S. Next post will have more numbers to compare so be ready!