How to Read Filleted Financial Statements (Used by Small UK Companies)
If you are interested in the financial performance of a UK company, you may want to look at its accounts. However, not all companies are required to file the same level of detail with the Companies House, the UK's registrar of companies. Some companies may choose to file filleted accounts, which are accounts that omit certain information that would otherwise be required by law.
What are filleted accounts?
Filleted accounts are a type of abbreviated accounts that some companies can file under certain conditions. Filleted accounts allow companies to leave out some of the information that would normally be included in their full accounts, such as:
- The profit and loss account, which shows the income and expenses of the company for the financial year.
- The directors' report, which provides a summary of the company's activities, achievements and future plans.
- The auditors' report, which gives an opinion on whether the accounts give a true and fair view of the company's financial position and comply with the relevant accounting standards.
Why do some companies file filleted accounts?
The main reason why some companies file filleted accounts is to protect their commercial confidentiality. By leaving out some of the information that would otherwise be publicly available, they can avoid disclosing sensitive data to their competitors, customers, suppliers or creditors. For example, they may not want to reveal their profit margins, turnover, operating costs or strategic objectives.
Another reason why some companies file filleted accounts is
to save time and money. Preparing full accounts can be a complex and costly
process, especially if they need to be audited by an independent accountant.
Filleted accounts can simplify the accounting and reporting requirements for
some companies and reduce their administrative burden.
Who can file filleted accounts?
Not all companies can file filleted accounts. Only small companies that qualify for certain exemptions can do so. According to the Companies Act 2006, a company is considered small if it meets at least two of the following criteria in a financial year:
- It has a turnover of not more than £10.2 million
- It has a balance sheet total of not more than £5.1 million
- It has not more than 50 employees
A company is considered a micro-entity if it meets at least two of the following criteria in a financial year. Micro-entities may be able to file even simpler micro-entity accounts.
- It has a turnover of not more than £632,000
- It has a balance sheet total of not more than £316,000
- It has not more than 10 employees
However, even if a company meets these criteria, it cannot file filleted accounts if it is:
- A public company.
- A banking or insurance company.
- A member of an ineligible group.
An ineligible group is a group of companies that includes:
- A public company.
- A banking or insurance company.
- A company that has securities listed on a regulated market.
- A company that is authorised to carry out certain regulated activities.
How to read filleted accounts?
If you want to read filleted accounts of a UK company, you can access them online through the Companies House website. You can search for the company by its name or number and download its latest accounts for free.
However, you should be aware that filleted accounts may not give you a complete picture of the company's financial performance and position. You may need to supplement them with other sources of information, such as:
- The balance sheet, which shows the assets and liabilities of the company at the end of the financial year.
- The notes to the accounts, which provide additional details and explanations about the figures in the balance sheet.
- The statement of changes in equity, which shows how the equity of the company changed during the financial year.
- The cash flow statement, which shows how the cash and cash equivalents of the company changed during the financial year.
- The confirmation statement, which confirms that the company has updated its information with the Companies House.
- The annual return, which provides basic information about the company's directors, shareholders and registered office.
You may also want to compare the filleted accounts with previous years' accounts or with other similar companies' accounts to get a better understanding of the trends and benchmarks in the industry.
Financial ratios and estimates that may help
If a business wants to protect itself against the financial risk of doing business with another company, it can use the accounts of that company to better understand its financial position. Despite being shortened accounts, there are still many things that you can learn by analyzing the data. By analyzing the debtors and creditors of a company, you can get a sense of its liquidity, solvency, and profitability.
Debtors are assets that represent money or goods that the company expects to receive from customers, suppliers, or other parties.
Creditors are liabilities that represent money or goods that the company has to pay to others, such as banks, suppliers, or employees.
Liquidity
Using debtors and creditors information, we can estimate the current ratio and the quick ratio of a company. These ratios measure the ability of a company to pay its current liabilities with its current assets and its liquid assets, respectively. A higher ratio indicates a better liquidity position. To calculate these ratios, we need to know the amount of debtors (money owed by customers) and creditors (money owed to suppliers due within one year) in the filleted accounts. Then, we can use the following formulas:
Current ratio = (Debtors + Inventory + Cash) / Creditors
Quick ratio = (Debtors + Cash) / Creditors
By comparing the debtors and creditors, one can get a sense
of how well the company can meet its short-term and long-term obligations, and
whether it has enough liquidity to operate smoothly. A low ratio of debtors to
creditors indicates that the company may have difficulty paying its debts,
while a high ratio suggests that the company has more financial flexibility and
stability.
Overdraft. It is also worth paying attention to the overdraft level at year-end. This could be an indicator of liquidity issues as overdrafts are both expensive and risky (repayable on demand), and companies don't won't use overdrafts unless they have to.
Gearing
This ratio will give you some indication of how risky a business is perceived to be based on the level of borrowing. This matters not just in terms of interest costs but a company will also find it more difficult to raise more debt if gearing is already high.
Gearing = Non-current liabilities/(Equity + Debt)
In the filleted account, non-current liability (NCL) would be the creditors due after more than one year, and debt would typically be bank loans. If debt information is not available, then just use NCL instead.
Profitability
The first three ratios below were referenced from this website.
Sales. Assuming that the debtors figure represents
money owed to the company from customers, it’s possible to use this information
to predict the company’s annual turnover. To make this estimation, you must
find out the company’s payment terms. You may be able to take an educated guess
if the company is in a sector you know a lot about. Example. If the terms state
that customers have 30 days in which to pay and debtors are showing as
£104,456, you can assume that debtors represents 30 days of sales. Divide one
by the other and multiply by 365 to get an annual gross sales estimate:
£104,456 /30 x 365 = £1,270,881.
In our example, the company has exceeded the VAT threshold of £85,000 turnover per year, so to find out the company’s sales net of VAT, just divide by 1.2 giving £1,059,068 in this case. Tip. Be aware that this is a really big assumption. Lots of other factors such as cash payments, non-customer debtors and seasonal fluctuations can affect the accuracy of the estimate. But it should give you some indication of the level of sales.
Sales growth. If you do the above calculation for the previous year as well, you could estimate the change in sales. Divide this change by the prior year’s sales to get the percentage increase/decrease in sales. For example, if the prior year’s debtors were £116,906, then the estimated sales are £1,185,297 and the change in sales is -£126,229 which means sales have fallen by:
-£126,229/£1,185,297 x 100 = -10.65%.
Profit margins. The creditors figure can be used to work out how much money the company spends in a year. This also requires an assumption on payment terms and uses the same method as how we worked out annual sales above. Be aware, however, that this figure could include any loans taken by the company, which will skew the results.
Once you know the sales revenue and expenditure, you can then work out a profit margin by finding the difference between sales and expenditure, divide by revenue and multiplying by 100.
Asset Turnover. This tells you how much revenue is earned per £ of asset.
Asset Turnover = Revenue/Total long term capital (Total asset-current liability)
Current liability is just your creditors falling due within 1 year.
ROCE. Once you have the net profit margin and the asset turnover, it would be possible to estimate the Return on Capital Employed, which is simply the two multiplied together.
ROCE=Profit before interest and tax / Total long term capital
=PBIT/Revenue x Revenue/Total long term capital
=Net Profit Margin x Asset Turnover
However, bear in mind that ROCE can also be affected by a large one-off asset disposal or a major asset purchase. So, a short term fall in ROCE may not be a bad thing if it is due to an investment in asset that can help to generate future revenue. And equally, a short term boost to ROCE by selling assets would not be good news if it impacts the company's ability to generate revenue.
Conclusion
It should be emphasized that financial ratios are only meaningful when used to for comparison in relative terms, either with results of the same company from previous years or with other companies in the same sector.
Filleted accounts can be useful for getting an overview of a UK company's financial situation, but they may not tell you everything you need to know. You should always exercise caution and due diligence when using them for any purpose.
