How to read PSX financial statements: income statement, balance sheet and cash flow
A plain guide to the three financial statements every PSX company publishes: what each line means, the ratios worth working out, the warning signs, and a five-point checklist for any set of results.
By the Nafa team · Updated · 5 min read
Every company listed on the Pakistan Stock Exchange publishes its accounts every quarter, and audited accounts every year. Three statements carry most of what you need: the income statement, the balance sheet and the cash flow statement. Here is how to read each one.
1. The income statement
The income statement shows what the company earned and spent over a period: a quarter, six or nine months, or a year.
Revenue (net sales)
The money the company took in from what it sells: cement for a cement maker, fuel for an oil marketing company. Banks are different: their main income is the interest they earn minus the interest they pay. Whether revenue is growing is the first thing to look at.
Gross profit
Revenue minus the cost of sales: what it cost to make or buy what was sold.
Gross margin = gross profit ÷ revenue × 100
Margins differ a lot between industries: a cement company might keep 25% of its sales as gross profit, a software company 70% or more. Compare a company with others in its own sector.
Operating profit
Gross profit minus selling, distribution and administrative costs. This is the profit from the business itself, before interest and tax.
Operating margin = operating profit ÷ revenue × 100
Finance cost
The interest the company pays on its loans. If finance cost eats a large part of operating profit, the company is carrying a lot of debt. When the State Bank raises interest rates, companies with floating-rate loans see this line jump.
Profit before and after tax
Operating profit, minus finance cost, plus other income, gives profit before tax. Take away tax and you have profit after tax: the bottom line.
Earnings per share (EPS) = profit after tax ÷ number of shares
EPS is the most watched figure in PSX results. Over the years, share prices tend to follow the growth in EPS.
Dividend per share
If the company declares a dividend, this is the cash paid on each share. The payout ratio (dividend per share ÷ EPS × 100) shows how much of the profit is paid out and how much is kept in the business.
2. The balance sheet
The balance sheet is a snapshot of what the company owns and what it owes on one date. What it owns (assets) always equals what it owes (liabilities) plus what belongs to the shareholders (equity).
Current assets
Assets expected to turn into cash within a year: cash, money owed by customers (trade receivables) and stock in hand.
Watch for: receivables growing faster than sales. It can mean customers are slow to pay, a serious problem for energy companies caught in Pakistan's circular debt.
Non-current assets
Long-term assets: plant, machinery, land and buildings, long-term investments. Spending on new plant (capital expenditure, or capex) adds to them and shows up in the cash flow statement.
Current liabilities
What the company must pay within a year: money owed to suppliers and short-term loans.
Current ratio = current assets ÷ current liabilities
Below 1 means more is due within the year than the company has in short-term assets: a sign to look closer.
Long-term debt
Loans, bonds and leases due after more than a year.
Debt to equity = total debt ÷ shareholders' equity
For a business that isn't a bank, debt below half of equity is generally comfortable. Debt above twice equity is a heavy load, especially when interest rates are rising.
Shareholders' equity
What is left for shareholders once everything owed has been deducted. This is the book value.
Price to book (P/B) = share price ÷ book value per share
3. The cash flow statement
This is the hardest statement to dress up. Profit includes sales that haven't yet been paid for; the cash flow statement shows only cash actually moving in and out.
Cash from operations
The cash the business itself produced. It should be positive year after year and not far from profit after tax. If profit is high but operating cash flow is negative, the company is booking profit it hasn't collected. That is a warning sign.
Cash from investing
Cash spent on plant and acquisitions, or received from selling assets. Growing companies spend heavily here.
Free cash flow = cash from operations − capital expenditure
Free cash flow is the money left to pay dividends, repay debt or invest in growth. It is the clearest measure of how much cash a business really makes.
Cash from financing
Money borrowed (in) or repaid (out), dividends paid (out) and new shares issued (in). A company that keeps borrowing to fund its day-to-day business is a warning sign.
A five-point checklist for any set of results
- Is revenue growing? If not, are margins improving?
- Is EPS growing? Look at three years or more, not one.
- Is operating cash flow positive and close to profit? A big gap needs an explanation.
- Is debt growing faster than equity? That points to a weakening balance sheet.
- Is the dividend covered? Dividend per share should sit comfortably below EPS.
Where to find the numbers
Listed companies file their results with PSX, where they appear on the PSX data portal, and publish their annual reports on their own websites.
On Nafa, every PSX stock page shows the company's yearly results, its ratios and its latest filings, and the latest financial results on PSX are listed as they come out.
