Understanding a company’s financial health is no longer just an accounting evaluation process but the main foundation for crafting a sustainable business direction.
Amid macroeconomic pressures, industrial disruption, and increasingly fast-changing market dynamics, the ability to read financial statements comprehensively becomes a crucial navigation tool for every top-level decision maker.
Beyond merely knowing profit and loss positions, this approach includes reading capital structure, the ability to generate sustainable profits, and the strength of cash flow as the main driver of long-term growth strategies.
Through three fundamental indicators liquidity, solvency, and profitability, management can identify risks early, evaluate operational efficiency, and ensure the company is on a financially healthy and competitive path. Here’s how:
Understand the Basics of Financial Statements
Solid financial assessment always begins with an understanding of the three main reports: the balance sheet, income statement, and cash flow statement. These three are like mirrors reflecting the financial condition of a company from different but complementary perspectives.
1. Balance Sheet
Provides an overview of the company’s assets, liabilities, and equity at a specific point in time. From the balance sheet, we can see how healthy the capital structure is: are more assets funded by debt or by equity?
For example, PT Indofood CBP Sukses Makmur Tbk (ICBP) in its Q3 2023 financial report recorded total assets of IDR 63.9 trillion, with liabilities of IDR 32.3 trillion and equity of IDR 31.6 trillion.
This means the capital structure is relatively balanced, with a debt-to-equity ratio of around 1.02. This ratio signals that the company is not overly reliant on external financing for its operations (a positive indicator of financial stability).
2. Income Statement
Shows how efficiently the company generates profit from incoming revenue. Here, we can see how revenue is reduced by operational expenses, taxes, and finally results in profit (or loss).
For example, PT Telkom Indonesia Tbk (TLKM) recorded revenue of IDR 152.3 trillion in 2023, with a net profit of IDR 24.6 trillion.
With a net profit margin of around 16%, Telkom demonstrates very good operational efficiency in the telecommunications industry, which faces significant competition and infrastructure pressure.
3. Cash Flow Statement
The cash flow statement illustrates the movement of money into and out of a company through three main activities: operating, investing, and financing. Understanding this report is essential, as many companies may appear profitable in their income statements but are actually under liquidity pressure due to persistently negative operating cash flows. This issue is explored in detail in an article by Ekuitas Advisory titled “Profits with Negative Cash Flow.”
Reading all three financial statements in an integrated manner is crucial. Relying on just one report can lead to a misleading picture of a company’s condition. A solid grasp of these fundamentals is necessary before diving into ratio analysis or benchmarking.
Financial Health Analysis Using Financial Ratios
Analysts and experts usually look from four main dimensions: liquidity, solvency, profitability, and operational efficiency. Each group of ratios offers different insights, and when read together, it can form a comprehensive picture of a company’s financial condition.
Reading financial statements without interpreting these ratios is like diagnosing a patient based only on blood pressure, without looking at body temperature, heart rate, or oxygen saturation.
1. Liquidity Ratios
Liquidity ratios measure a company’s ability to meet short-term obligations using current assets. The two main ratios here are the Current Ratio and Quick Ratio. Here are the formulas:
Current Ratio = Current Assets / Current Liabilities
This ratio shows how much current assets the company has to cover every rupiah of its upcoming debt. As a general benchmark, the ideal value is usually between 1.5 and 2.0, but this heavily depends on the industry.
Retail or distribution sectors can tolerate lower ratios due to fast cash cycles, whereas manufacturing and property need a larger cushion. For example, PT Unilever Indonesia Tbk consistently maintains a current ratio between 1.5 and 2. This means for every IDR 1 of short-term debt, the company has IDR 1.5–2 in cash, receivables, or inventory—sufficient to buffer liquidity pressures without seeking additional debt.
However, a current ratio that’s too high could indicate that current assets are not being used optimally. In business, this could mean too much idle cash or stagnant inventory—both of which can reduce profit potential.
Meanwhile, the Quick Ratio excludes inventory from the calculation. This is useful in sectors like manufacturing, where inventory may take a long time to convert to cash. A low quick ratio in such sectors could be a red flag for investors.
2. Solvency Ratio
If liquidity ratios speak about today and tomorrow, solvency ratios target long-term foundations. Solvency is not merely about having debt or not, but more about how the composition of debt and equity reflects the company’s overall risk management.
Solvency ratios measure how well a company can bear its long-term debt burden without compromising financial stability. It provides insight into the funding structure: how much of the company is financed by equity compared to loans.
This is crucial because large amounts of debt can increase the risk of default, especially if company revenues are volatile or interest costs rise. To assess this, two important and complementary ratios are used: Debt to Equity Ratio (DER) and Interest Coverage Ratio (ICE).
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- Debt to Equity Ratio (DER)
DER measures how much of a company’s financing comes from debt compared to shareholders’ equity. This is a key indicator of solvency as it reflects financing structure and dependency on external funds.
DER Formula:
DER = Total Debt / Equity
A high DER indicates the company is more aggressive in using debt for operations or expansion. This can be a legitimate growth strategy, provided the company’s cash flow is strong enough to meet obligations. However, a very high DER also increases financial risk, especially if revenue is unstable.
Conversely, a very low DER may mean the company is too conservative. Although this reflects lower risk, the company may miss opportunities for faster growth due to overreliance on equity.
For instance, Indofood CBP (ICBP) recorded a DER of around 1.02 in Q3 2023. This shows a balanced financing structure—not too aggressive, but flexible enough to fund expansion. In a stable cash flow industry like food, such a ratio is considered healthy.
By contrast, GoTo (Gojek Tokopedia) post-IPO recorded a high DER due to relying on loans and external investments to accelerate growth. But when investors began demanding efficiency and profitability, the large debt structure became a burden, forcing the company to cut costs and restructure its portfolio.
The comparison between Indofood CBP and GoTo shows that an ideal debt structure heavily depends on the industry context and company development stage. Thus, a healthy DER is not about how low or high the number is, but about alignment between financing structure, business character, and sustainable cash flow capability.
- Interest Coverage Ratio (ICE)
If DER explains how much debt the company has, then ICE answers: “Can the company consistently pay the interest on that debt without disrupting operations?”
ICE measures the ability of a company to pay interest from its operating income (EBIT). This is important because interest is a fixed obligation that must be paid regardless of business conditions. When interest can’t be paid, the risk of default rises sharply.
ICE Formula:
ICE = EBIT / Interest Expense
- EBIT (Earnings Before Interest and Taxes): pure operating profit, not yet reduced by interest and taxes
- Interest Expense: total interest obligations on loans for a given period
Why is ICE important? Many companies go bankrupt not because they’re unprofitable, but because they can’t pay interest or installments soon enough. In a volatile market or when interest rates rise, companies with low ICE become highly vulnerable.
ICE Interpretation:
- ICE < 1: company doesn’t have enough operating income to pay interest. This is a danger sign—cash flow is under severe pressure.
- ICE = 1–2: vulnerable position, can still pay interest but has no breathing room if profit drops slightly.
- ICE > 3: considered healthy—company has enough profit margin to cover interest while maintaining operations.
- ICE > 5: company has full flexibility, can use debt as a tool for expansion without heavy short-term burdens.
Take PT Garuda Indonesia as an example. Leading up to the pandemic crisis, Garuda had significant debt from aircraft leasing and long-term loans. When the pandemic hit the aviation sector and revenues dropped sharply, Garuda’s ICE plummeted below 1.
Meaning, operational profit was no longer enough to pay interest. The company eventually defaulted on its obligations, entered debt restructuring, and underwent PKPU (debt postponement proceedings).
This example shows that even with large assets and market share, without a healthy ICE, a company has no resilience to face crises.
3. Profitability Ratios
Many companies appear to be growing on paper, revenues are increasing, customer bases are expanding, and product lines are multiplying. However, behind all this growth lies one essential question: is it actually generating healthy and sustainable profits? This is the core of profitability risk, the company’s ability to create long-term economic value through its business operations.
Profitability risk typically arises when a company cannot generate sufficient returns from its core activities. To detect this, we use several financial ratios that assess a company’s efficiency, effectiveness, and margin strength in producing profits.
• Return on Assets (ROA)
ROA measures how effectively a company uses its total assets to generate net income. It is a key indicator of overall operational efficiency. The higher ROA, the more profit is being produced per unit of asset.
ROA = Net Profit / Total Assets
For instance, PT Unilever Indonesia Tbk (UNVR) posted a net profit of IDR 5.4 trillion in 2023 from total assets worth IDR 19.5 trillion. This means its ROA was approximately 27.7%. This exceptionally high figure, indicating that company’s assets—factories, inventories, and distribution networks—were used very efficiently to generate profits.
• Return on Equity (ROE)
While ROA focuses on how all assets contribute to profit, ROE focuses specifically on how effectively shareholder equity being used. ROE measures how much profit generated from investors’ capital. Investors pay close attention to this metric, as it directly reflects the return on their investment.
ROE = Net Profit / Shareholders’ Equity
A strong example is PT Bank Central Asia Tbk (BBCA). In 2023, BCA reported a net profit of IDR 48.6 trillion and total equity of IDR 238 trillion, resulting in an ROE of approximately 20.4%.
For the banking sector, this considered an excellent performance. It indicates that BCA is not only efficient in managing credit and third-party funds, but also skilled at optimizing shareholder capital.
A high ROE often reflects a profitable and efficient strategy. However, it can also appear inflated if the equity base is very low due to heavy reliance on debt. This why ROE should always analyzed together with Debt to Equity Ratio (DER).
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• Net Profit Margin and Gross Profit Margin
When a company posts high sales, the next question is: how much of that revenue turns into actual profit? This is where two critical indicators come in—gross profit margin and net profit margin. These metrics help us understand both the company’s cost control and overall financial strength in turning revenue into profit.
Gross profit margin shows how much money is left after paying all direct costs related to producing goods or services. It’s the “raw margin” available to cover all other expenses such as salaries, utilities, marketing, and R&D. The higher the margin, the more efficient the company is at managing production costs.
Gross Profit Margin = (Gross Profit / Revenue) × 100%
On the other hand, Net Profit Margin focuses on the bottom line—how much of the total revenue ends up as net income after subtracting all costs, including operating expenses, interest, and taxes.
Net Profit Margin = (Net Profit / Revenue) × 100%
Let’s consider two real examples from major Indonesian companies.
First, PT Kalbe Farma Tbk (KLBF) posted revenue of IDR 30.8 trillion and gross profit of around IDR 13.5 trillion in 2023. Calculating the margin:
(13.5 / 30.8) × 100% ≈ 43.8%
This indicates that nearly half of Kalbe’s revenue remained after covering production costs—an excellent margin for the pharmaceutical industry, reflecting highly efficient management of raw materials and manufacturing.
Next, PT Astra International Tbk (ASII), which operates in various sectors from automotive to finance, recorded revenue of IDR 316 trillion and net profit of IDR 34.8 trillion in 2023. This gives:
(34.8 / 316) × 100% ≈ 11%
This means that for every IDR 100 in revenue, Astra retains about IDR 11 as net profit. While not as high percentage-wise as Kalbe, it’s still a strong margin considering Astra’s diverse and complex business portfolio.
By analyzing both margins together, we gain a clearer view of how efficiently money moves through the company—from gross sales to final profit. Gross margin speaks to production efficiency, while net margin reflects the company’s end-to-end operational effectiveness
4.Efficiency Ratios
While profitability tells us how much profit a company generates, efficiency ratios reveal how well the company utilizes its resources. In today’s increasingly competitive business landscape, efficiency can be the key differentiator between companies that survive and those gradually pushed out of the market.
Efficiency doesn’t simply mean cost-cutting. In a strategic context, efficiency means being able to produce optimal results using proportional resources—neither excessive nor wasteful.
The two most commonly used ratios in this category are:
• Total Asset Turnover
Total Asset Turnover indicates how much revenue generated from every rupiah of assets. This ratio reflects the productivity of all company assets, including buildings, machinery, inventory, and receivables.
If company owns large asset base but produces relatively little revenue, it may be a sign of inefficiency—meaning those assets are not being “worked” hard enough. On the other hand, a high turnover ratio indicates that the assets are being used productively to generate steady income.
• Operating Expense Ratio (OER)
Operating Expense Ratio shows how much a company’s revenue spent on operating costs. This includes salaries, electricity, marketing, logistics, and other expenses—but excludes cost of goods sold (COGS) and loan interest.
This ratio reveals the level of “budget leakage” in daily operations. The higher the ratio, the more costly it is for the company to run its day-to-day activities. If revenue stays flat while operating expenses continue to rise, margins will squeezed and profitability will suffer.
These are the key steps to understanding a company’s financial health—starting with reading the balance sheet, income statement, and cash flow statement, then linking them to key financial ratios such as liquidity, solvency, profitability, and efficiency. With this integrated understanding, both you and your management team will have a stronger foundation to navigate changes in the market.
Because a company’s financial health not solely determined by how much revenue it earns or how many assets it owns—but by its ability to survive, adapt, and grow sustainably.
Curious about how financially healthy your business really is? Arghajata Consulting can help you evaluate your financial statements comprehensively. Let’s discuss your business together—and discover areas for improvement before problems arise.
