The Saudi financial market offers a wide range of investment opportunities, and more people are looking for ways to grow their savings through informed decisions. To succeed, investors need reliable tools that turn raw data into clear insights, not guesses or reactions to market noise. One of the most valuable tools is the financial statement. It gives an honest view of a company’s financial health and day-to-day operations, helping you assess performance and spot trends.
This guide explains how to read financial statements, focus on the details that matter, and use them to evaluate companies before you invest. We’ll break down the main types of statements, show how to analyze them, and highlight key indicators, with real examples from the Saudi market.
What Are Financial Statements and Why Read Them?
Financial statements are periodic reports that listed companies publish. They come quarterly and annually. They include detailed numbers that let an investor evaluate a company’s financial condition. Reading these statements lets you:
- Assess the company’s financial position.
- Compare performance with peers.
- Judge the sustainability of growth and profits.
- Estimate investment risk.
Without these reports, you risk making decisions on incomplete information. That can increase your exposure to loss.
The Main Types of Financial Statements
Each statement plays a different role. Together, they form a complete financial picture.
Balance Sheet
Shows what a company owns (assets), what it owes (liabilities), and shareholders’ equity, essentially a snapshot of the company’s financial position at a given date.
Income Statement
Reflects the company’s operating performance over a period, detailing revenue, expenses, and net profit.
Cash Flow Statement
Tracks the movement of cash in and out of the company, helping you understand liquidity and the ability to meet obligations.
Statement of Changes in Equity
Shows changes in capital or retained earnings, such as dividends or new share issuances.
Understanding the Balance Sheet
The balance sheet is divided into:
- Assets: Current assets (cash, receivables, inventory) and non-current assets (property, equipment, long-term investments).
- Liabilities: Short-term obligations (accounts payable) and long-term obligations (loans).
- Shareholders’ Equity: Capital, retained earnings, and reserves.
Why it matters for investors:
Analyzing the balance sheet helps you assess a company’s ability to meet its obligations and its reliance on debt versus equity financing. Comparing current assets to current liabilities reveals liquidity.
Example:
If STC (Saudi Telecom Company) reports current assets of SAR 10 billion and current liabilities of SAR 7 billion, the current ratio is 10 ÷ 7 = 1.43 — generally considered healthy, indicating reasonable capacity to pay short-term obligations.
Analyzing the Income Statement
The income statement shows how the company generates revenue and controls expenses.
Key line items include:
- Revenue or net sales
- Cost of goods sold
- Gross profit
- Operating expenses (administrative, marketing, etc.)
- Net profit after tax
Key ratios:
- Gross profit margin = Gross profit ÷ Revenue
- Operating profit margin = Operating profit ÷ Revenue
- Net profit margin = Net profit ÷ Revenue
Higher margins indicate better efficiency in managing operations and generating profit from sales.
Example:
In its annual report, Almarai achieved a net profit margin of 12%, a strong figure for the food and beverage sector, reflecting solid profitability from each riyal in sales.
Reading the Cash Flow Statement
This statement explains how a company uses and generates cash, divided into:
- Operating activities: Cash from sales, supplier payments.
- Investing activities: Purchase or sale of fixed assets.
- Financing activities: Loan repayments, dividend distributions.
Why it’s important:
Even profitable companies can face financial strain if they have prolonged negative cash flows.
Example:
A company may report net profits but rely heavily on loans to fund daily operations, which is a red flag for potential financial instability.
Key Financial Indicators for Investors
Using financial ratios helps compare companies quantitatively:
- Return on Equity (ROE) = (Net Profit ÷ Shareholders’ Equity) × 100
Measures management’s ability to generate profit from shareholders’ funds. - Price-to-Earnings (P/E) Ratio = Market Price per Share ÷ Earnings per Share
Helps identify whether a stock is overvalued or undervalued. - Debt-to-Assets Ratio = Total Debt ÷ Total Assets
Evaluates reliance on external financing. - Current Ratio = Current Assets ÷ Current Liabilities
A ratio above 1 generally indicates better short-term solvency.
Using Financial Statements to Evaluate Investment Funds
Even though funds are managed by professionals, understanding their own statements (or those of the companies they invest in) allows you to assess whether they align with your goals.
Suggested steps:
- Read the fund’s prospectus and annual reports.
- Review portfolio composition (sectors, companies, concentration levels).
- Analyze the financials of companies in the portfolio.
- Understand costs such as management and operating fees.
Important note:
These indicators don’t guarantee returns. Always consider market and economic conditions before investing.
The Link Between Financial Statement Analysis and Stock Purchases
Stock purchases in the Saudi market should not be based on casual tips, short-term performance, or unofficial recommendations. A thorough analysis of a company’s financial statements should precede any purchase decision.
Key questions to answer before buying:
- Is the company growing steadily?
- Is it overly dependent on debt financing?
- Can it maintain consistent dividend payouts?
Analyzing financial statements provides data-driven insight into whether a stock is attractive for purchase.
Conclusion
You don’t need to be an analyst to read financial statements. For any investor, they’re a practical tool for judging how a company is really doing. In Saudi Arabia, these reports can tell you a lot about performance and give you a firm base for deciding where to invest.
The more you work with them, the easier it becomes to tell strong companies from those facing difficulties. Just remember, markets are influenced by more than numbers, so always consider the wider risks before you invest.
Disclaimer: All information provided is for educational and awareness purposes only. It does not constitute an investment recommendation. Past performance is not indicative of future results. Please consult your financial advisor before making any investment decision.
Derayah Financial, licensed by the Capital Market Authority, License No. 27-08109 dated 19/06/1429H (23 June 2008).
Frequently Asked Questions
1- What are the steps to analyze a company’s financial statements?
- Start by gathering the financial statements, such as the income statement, balance sheet, and cash flow statement, for several periods.
- Analyze key financial ratios such as profitability, liquidity, and debt levels.
- Compare the results with other companies in the same sector to identify strengths and weaknesses.
- Review financial trends over time to make a well-informed decision.
2- How does financial analysis affect investment decisions?
Financial analysis allows you to assess a company’s stability and profitability before investing, helping you understand its true performance. It also uncovers hidden risks and potential growth opportunities that may not be immediately visible. By examining financial indicators, you can judge whether a stock is overvalued or undervalued. This process strengthens your ability to make more informed and accurate investment decisions.
