Annual reports are the only published documents that contain abundant information about a company’s performance. To get the most out of them, investors should have the right skills and knowledge. This blog outlines the basic components of an annual report and how to glance through the document if one has limited time.
1. Letter to shareholders or chairman’s statement: An overview of the organisation’s business and financial performance.
The first and last two paragraphs should be read in detail to get a gist of how the business is going. This section should also provide a comparison with last year’s performance and a brief explanation for any changes.
2. Business review: A summary of the company’s recent developments, trends and objectives
3. Financial review: A presentation of the company’s financial performance including the financial statements and audited financial statements. The basic financial statements include: Balance sheet, Income statement, Statement of cash flows, Footnotes.
Key elements to check:
- Net profits: positive or not, rising or falling
- Sales: rising or falling
- Operating cash flow after working capital adjustments: positive or negative
- Net debt: rising or falling
- Dividends: rising or falling (as a percentage of net profits)
- Shareholder’s equity: rising or falling
- Return on equity: higher is better
- Return on capital: higher is better
Investors can look for the segmental breakdown to see which segment(s) is producing more of the company’s sales and earnings and what debt the company has to resolve in the near future.
Other things to remember
- Make sure the independent auditors gave the company a clean bill of health
- For areas of problems or deterioration, search for an explanation in the report or from the company itself
Stay tuned for the next blog post to go deeper into the art of reading annual reports. In the meantime, download the first part of our whitepaper for your reference.