Annual Accounts Explained: How to Read Financial Statements

Financial statements show how a business's economy has developed over a specific period, and what the business owns and owes on the balance sheet date. For suppliers, customers, and owners, the accounts can provide useful signals about size, profitability, financing, and solvency.

However, financial statements contain historical information. An annual report can be several months old when you read it. It should be combined with fresh register status, announcements, and information from the business.

Bookkeeping and Annual Accounts

Most businesses are required to keep accounts. Some are only subject to bookkeeping requirements, while businesses subject to accounting requirements must also prepare and submit annual accounts to the Register of Company Accounts (Regnskapsregisteret). All limited companies (aksjeselskap - AS) are subject to accounting requirements, while many sole proprietorships (enkeltpersonforetak) are typically only subject to bookkeeping requirements.

Annual accounts and tax returns are two different reporting obligations. Brønnøysundregistrene (The Brønnøysund Register Centre) states that businesses with a reporting obligation must submit complete annual accounts by 31 July at the latest when the financial year ends on 31 December. Deadlines and amounts may change and should be verified with the authorities.

The Profit and Loss Account

The profit and loss (P&L) account shows income and expenses over the period. Key items include:

• sales revenue and other operating income
• cost of goods sold
• personnel expenses
• other operating expenses
• depreciation
• operating profit
• financial income and financial expenses
• profit before tax
• net profit/loss for the year

Start by looking at the trend in operating income. Then see if the operating profit is developing in the same direction. Growth that requires continuously increasing costs can result in weaker margins even if turnover increases.

The Balance Sheet

The balance sheet shows assets, equity, and liabilities on a specific date:

Assets = Equity + Liabilities

Assets are usually divided into non-current assets and current assets. Non-current assets are intended for more permanent ownership or use, while current assets are related to ongoing operations, such as bank balances, inventory, and accounts receivable.

Liabilities are divided into long-term and short-term debt. Short debt maturities combined with limited available funds can create liquidity risk.

Cash Flow

Profit and cash flow are not the same. Income may be recognised before the customer pays. Investments can consume significant funds without being fully charged to the profit and loss account in the same year. The cash flow statement shows payments from operating, investing, and financing activities, when the business is required to or chooses to present it.

Notes Provide Necessary Context

The notes can explain items that would otherwise be difficult to understand. Pay particular attention to:

• accounting principles
• uncertain liabilities
• loans and collateral
• related party transactions
• number of employees and wages
• depreciation periods
• changes in equity

Two companies with similar headline figures can have very different risks when the notes are taken into account.

Five Key Ratios to Start With

1. Revenue Growth: change in income from the previous year.
2. Operating Margin: operating profit divided by operating income.
3. Current Ratio: current assets in relation to short-term liabilities.
4. Equity Ratio: equity divided by total assets.
5. Debt-to-Equity Ratio: debt in relation to equity.

Key figures must be compared over time and against the relevant industry. They are analytical tools, not an automatic judgment of the company.

A Simple Example

A company has NOK 25 million in operating income, NOK 2 million in operating profit, NOK 12 million in assets, and NOK 4 million in equity.

• Operating Margin: 2 / 25 = 8 percent
• Equity Ratio: 4 / 12 = 33.3 percent

The figures must then be assessed against previous years, the industry, and the quality of the assets. If a large portion of the assets consists of old accounts receivable, the balance sheet may appear stronger than the actual solvency.

Common Mistakes When Reading Financial Statements

• focusing solely on turnover
• confusing company accounts and consolidated accounts
• overlooking currency or changed accounting periods
• interpreting one year as a trend
• ignoring the notes
• assuming that a positive profit means good liquidity
• comparing businesses in completely different industries

How Proffi Should Present Financial Figures

Each figure should include the year, currency, unit, and source. Calculated key figures should show the formula and underlying items. The user should be able to switch between table and graph, compare with the industry, and open the official financial statements.