Financial Statements in the Saudi Stock Market: Detailed Explanation with

Financial statements are periodic accounting reports that reflect a company's financial condition and operational performance over a specific period. They consist of four main documents: the income statement, the balance sheet, the cash flow statement, and the statement of changes in equity.

1. Income Statement: Shows revenues, expenses, and net profit or loss over a specific period. This statement helps evaluate the company's ability to generate profits from its operational activities.

2. Balance Sheet: Displays assets, liabilities, and equity at the end of the period. This statement clarifies the company's stability and financial solvency.

3. Cash Flow Statement: Focuses on cash movement in and out of the company, covering operating, investing, and financing activities. It highlights the company's ability to generate cash and meet obligations.

4. Statement of Changes in Equity: Shows changes in shareholders' equity due to profits or losses during the period, cash or stock distributions, and capital increases or decreases.

Together, these statements provide a comprehensive picture of the company's financial situation, aiding decisions based on accurate and reliable data.

The Saudi Capital Market Authority (CMA) mandates all listed companies on Tadawul to disclose their financial statements periodically, either quarterly or annually. These financial statements must be prepared according to International Financial Reporting Standards (IFRS) since 2017. The goal of this regulation is to standardize accounting practices, ensure transparency, and enable comparability between local and international companies.

Financial statements are subject to external review by independent auditors, enhancing their credibility and reliability. Additionally, companies are required to disclose detailed notes on accounting items, significant events, and any substantial changes in financial performance.

These requirements are part of ongoing efforts to enhance the confidence of local and foreign investors in the Saudi financial market, protect stakeholder rights, and improve market efficiency. Moreover, companies' commitment to publishing financial statements on time is considered a standard of good governance and accountability to regulatory authorities.

Financial statements play a crucial role in evaluating companies listed in the Saudi financial market. They represent the primary source of information relied upon by investors and financial analysts to understand the company's financial condition and estimate its future performance.

By analyzing the income statement, trends in revenues and profits can be tracked over several periods, helping to assess the company's ability to achieve sustainable profit growth. The balance sheet reflects the quality of assets, the level of debt, and the strength of equity, which determines the financial risks faced by the company.

The cash flow statement highlights the company's ability to generate cash from its operational activities, the efficiency of financial resource utilization in investments, and the repayment of debts or distribution of dividends. The statement of changes in equity illustrates the company's continuity in retaining or distributing profits and the contribution of capital to growth.

Based on this information, investors can compare companies within the same sector and understand their strengths and weaknesses, enabling more informed decision-making. However, these analyses remain references and should not be considered investment recommendations without consulting a licensed financial advisor.

The income statement is one of the most important financial statements, as it displays details of revenues, expenses, and net profit or loss for a specific period. The statement typically begins with total revenues generated from selling products or services, then deducts the cost of sales to arrive at gross profit.

Next, operating expenses such as salaries, rents, and administrative expenses are subtracted to reach operating profit. Other items such as non-operating revenues or expenses, and sometimes taxes, may be added or deducted to obtain net profit or loss.

The importance of the income statement lies in its ability to clarify the company's capacity to achieve profits from its core activities and assist in measuring management's efficiency in controlling costs. This statement also allows for comparisons between different periods or with other companies in the same sector. Analyzing the income statement is a fundamental step in understanding the company's profitability performance and forecasting its future trends, considering that results depend on specific accounting policies that should be reviewed in the accompanying notes.

The balance sheet, or statement of financial position, presents a detailed picture of the company's assets, liabilities, and equity at the end of each accounting period. Assets are typically divided into current assets (such as cash, inventory, and accounts receivable) and non-current assets (such as property, machinery, and long-term investments).

Liabilities are divided into current liabilities (due within a year, such as payables and short-term loans) and long-term liabilities (such as long-term bank loans and bonds). Equity includes paid-in capital, retained earnings, and any other reserves.

The significance of this statement lies in its ability to allow investors to assess the company's financial position, understand its reliance on debt versus self-financing, and analyze asset strength. It also aids in analyzing liquidity (the ability to meet short-term obligations) and financial solvency (the ability to meet long-term obligations). Reading this statement alongside analyzing financial ratios such as the debt-to-equity ratio and current ratio is essential in evaluating the company's financial risks.

The cash flow statement illustrates the cash movement in and out of the company during a specific accounting period and is divided into three main activities:

1. Cash flows from operating activities: Represent cash generated from the company's core activities, such as selling products or providing services and paying operating expenses. These flows are a key indicator of the company's ability to finance its operations independently.

2. Cash flows from investing activities: Include transactions for purchasing or selling fixed assets or investments in other companies. Outflows here typically indicate company expansion, while inflows suggest liquidating investments.

3. Cash flows from financing activities: Relate to obtaining financing from shareholders or banks (such as issuing shares or loans) or repaying debts and distributing dividends.

Reading the cash flow statement helps investors assess the sustainability of liquidity and support the company's financial obligations, determining whether the company excessively relies on external financing or generates positive cash flows from operations.

The statement of changes in equity details any changes in the components of shareholders' equity during the reporting period. This includes realized profits or losses, cash or stock distributions, capital increases or decreases, and any reserves or valuation differences.

This statement is essential for understanding the company's policies on profit distribution or reinvestment and its ability to enhance capital from retained earnings. It also shows the stability of the shareholder base and the impact of non-recurring events such as issuing new shares or repurchasing shares.

This statement helps shareholders and analysts track the evolution of equity over time, evaluate changes in capital, and assess their impact on the company's financial strength. Comparing this statement with other financial statements provides a more comprehensive picture of how the company achieves growth and financial sustainability.

Hail Cement Company (symbol: 3001) serves as a practical example of how to read the financial statements of a listed company in the Saudi market. In the first quarter of 2024, the company reported a net profit of 15 million SAR, a decrease of 19% compared to the same period last year. Its annual profit for 2023 was 24.6 million SAR. This performance reflects the company's exposure to fluctuations in demand and production costs in the cement sector.

Regarding liquidity, the company announced a cash dividend of 3.5% for the fourth quarter of 2023, indicating management's commitment to supporting shareholders despite profit volatility. The stock was trading around 11.60 SAR in mid-2024, reflecting the market's assessment of the company's financial situation amid current events.

The price-to-earnings (P/E) ratio was relatively high due to the decrease in profits compared to the stock price. These indicators reveal the importance of analyzing financial statements comprehensively and not relying on a single figure for evaluation. They also highlight the importance of following significant news such as acquisitions, as shareholders of Qassim Cement approved the acquisition of Hail Cement, leading to the suspension of its stock trading and the initiation of delisting procedures.

Financial ratios derived from financial statements are used to evaluate the company's performance from several angles:

1. Stock Price: Was 11.60 SAR in mid-2024, reflecting market reactions to the company's results and sector developments.
2. Market Capitalization: Calculated by multiplying the stock price by the number of issued shares, indicating the company's relative size in the sector.
3. Price-to-Earnings (P/E) Ratio: Estimated by dividing the stock price by earnings per share, reflecting investors' willingness to pay higher multiples for expected earnings.
4. Dividend Yield: The dividends were 3.5% for the fourth quarter of 2023, indicating a balanced dividend distribution policy.
5. Revenue Growth: The company experienced a decline in annual and quarterly profits, reflecting sector challenges.

Analyzing these ratios shows the necessity of linking accounting data to market changes and significant events such as acquisitions, while considering the overall sector context when interpreting the numbers.

Hail Cement's stock belongs to the Saudi cement sector, which includes several major local companies such as Qassim Cement, Saudi Cement, and Al-Jouf Cement. The sector plays a vital role in meeting the construction and infrastructure needs in the Kingdom but faces challenges such as excess production capacity, cost pressures, and intense competition.

In recent years, the sector has seen a trend towards integration and acquisitions, as occurred with Qassim Cement's acquisition of Hail Cement in 2024. These steps aim to improve operational efficiency, reduce redundant costs, and enhance the sector's overall competitiveness.

Competition among companies remains based on quality, product diversity, and cost control capabilities. The performance of companies also depends on local demand tied to Saudi Vision 2030 projects. Analyzing the financial statements of sector companies provides investors with a clearer picture of each company's ability to adapt to challenges and capitalize on future opportunities.

Significant news, such as acquisitions or mergers, plays a major role in altering the structure of financial statements for listed companies. In the case of Hail Cement, the approval of Qassim Cement's shareholders for the acquisition in June 2024 led to the initiation of delisting procedures for Hail's stock and its transformation into a subsidiary of Qassim.

Such developments directly impact financial statements by integrating assets, liabilities, revenues, and expenses into the consolidated reports of the parent company. These processes also affect financial indicators such as market capitalization and profitability ratios, making it essential for investors to follow the consolidated financial data post-acquisition.

This case emphasizes the importance of tracking official news and periodic reports from companies, rather than relying solely on historical data. It also highlights the significance of disclosure and transparency in the Saudi financial market and the role of financial statements in clarifying the impact of significant events on companies.

Financial statements provide a reliable platform for analyzing listed companies and assessing their financial status. To optimally benefit from these statements, investors or financial analysts should follow systematic steps:

1. Comprehensive Reading: Review all financial statements rather than focusing on just one.
2. Trend Analysis: Compare current results with previous periods to uncover positive or negative changes in performance.
3. Use Financial Ratios: Such as profit margin, debt-to-equity ratio, and asset turnover rate to analyze efficiency and solvency.
4. Compare with Similar Companies: To understand the company's position within the sector.
5. Review Notes: To understand accounting policies and non-recurring events.

Through this methodology, risks can be minimized, and the ability to make decisions based on accurate and transparent information can be increased. However, it remains essential to consult a licensed financial advisor before making any investment decisions based on these statements.

To obtain financial statements and reports of listed companies in the Saudi financial market, there are several reliable official sources:

1. The Saudi Capital Market Authority (CMA) website: Provides annual and quarterly reports for all listed companies.
2. The Saudi Stock Exchange 'Tadawul' website: Allows downloading financial documents and official disclosures directly for each company.
3. Specialized financial news websites such as 'Argaam', 'Bloomberg', and 'Reuters': Offer analyses and summaries of financial results.
4. The companies' own websites: Often provide annual reports and periodic announcements about their results.

It is always advisable to rely on official sources and verify that financial statements have been reviewed by independent auditors. Additionally, any additional disclosures or notes attached to the statements should be followed to understand the complete picture of the company's financial situation.

Despite the importance of financial statements in evaluating companies, there are some limitations to be aware of:

1. Accounting Policies: May differ between companies and impact the results of the statements.
2. Non-Recurring Events: Such as the sale of a significant asset or receiving an exceptional compensation may alter results for a specific period without reflecting true operational performance.
3. Regulatory or Tax Changes: Can affect profits or financial position from one period to another.
4. Manipulation or Accounting Errors: Despite external review, errors or inaccurate estimates may occur.
5. Sectoral or Economic Changes: May make historical comparisons less accurate.

Therefore, it is always preferable to read financial statements in conjunction with economic news, official disclosures, and sector analysis, and not to rely solely on a single figure when making investment decisions.