Every February and August, business news sites are full of headlines about company reports and “earnings season”.

That’s because in Australia, most companies have a reporting period ending June 30 – the end of the financial year – meaning they will release their full-year results in August and half-year results in February.

Share prices can move dramatically depending on the company’s performance or its comments about the outlook.

If you’re new to investing and want to understand some of those results by reading company financial statements, here’s where to start.

What is a company financial statement?

Company financial statements show what a business owns, owes, earns and spends. It is like an annual health check-up for a business, written in numbers.

Company financial statements are prepared in accordance with Australian Accounting Standards.

Most listed companies publish their financial statements on their company website, usually in an investor or annual reports section. They are free to access. They are also published on the Australian Securities Exchange (ASX) website.

What to read first

If you’re new to financial statements, start with the big picture before diving into the numbers.

First, look for the trading update in the half-year report or chief executive’s letter at the beginning of the full-year report. This explains the company’s performance in plain language and will discuss the results for different segments of the business.

You can then look at the statement of profit or loss, which shows the profit or loss for the period.

Revenue is what they have earned – but that’s not counting any costs.

Net profit after tax (known as NPAT) shows total income minus expenses and how much profit is available to shareholders after tax is paid. This is the key measure used in reporting season news stories.

Another term you might run into is EBIT (earnings before interest and tax). EBIT shows profit from core operations before financing costs and tax are taken out. So it is considered a measure of underlying profitability.

Earnings per share (EPS) shows the portion of a company’s profit attributed to each ordinary share in the company.

A closer look at the numbers

After getting a sense of the big picture, the statement of financial position tells you what the company owns and owes.

What percentage of the total assets of the company is made up of liabilities – what the company owes?

Note that “current” assets and liabilities are expected to be converted to cash, or due for payment within 12 months. A company should have enough current assets to pay for its current liabilities.

Total assets less total liabilities equals the total equity: the shareholders’ stake in the company. A negative figure means the company owes more than what the assets are worth. That’s why this statement is often called the balance sheet.