7 Key Items to Evaluate In Annual Report and Accounts

The annual report and accounts is one important document that you are entitiled to receive from your company every year as a shareholder.  It is prepared by  managment at the end of every fiscal year to give a summary of the company’s activities for that fiscal year and a projection for the coming years.

Share holders are invited by the directors to attend an Annual General Meeting every financial year. Usually, the meeting is held within the first quarter of the new year to consider the audited accounts for the previous year, approve appointment of new auditors and directors if need be and most importantly approve payment of dividend as recommended by the directors. 

Prior to this meeting, the annual reports and accounts must have been circulated to all qualifying shareholders to enable them prepare for the meeting.  A qualifying shareholder is one whose name is in the shareholders register as at the previous closure date.

Users of Annual Report

The Annual Report and Accounts are prepared for external users to enable them have an understanding of how the company is performing and of its future plans.

Thus apart from shareholders, the Annual Report is of interest to other stakeholders such as regulatory authorities, potential investors and analysts.  If you are researching a stock to invest in, the current annual report of the company of interest is the best document to start with.  It contains essential information about the company to aid your decision.

Content of Annual Report and Accounts

A typical annual report will contain the following

  • Financial statements (Profit and Loss Accounts, Balance Sheet, Notes to the Accounts) for the preceding year and a five year financial summary,
  • the chairman’s review of business and events in the preceding year,
  • Auditor’s report,
  • the directors’ reports (or management report) and
  • list of major shareholders and
  • profile of the directors as well as the address of the company.

The Chairman’s statement is a formal address to shareholders highlighting economic and political events that shaped the business of the company in the preceding year, the challenges, remedial actions taken and brief strategic directions for the coming year.

The purpose of the document is to keep shareholders and other relevant stake holders informed on the state of the company.

Why should you bother to read the annual report?

Usually it is the only official communication from the company highlighting progress, financial statements and operational issues affecting the company.  It will help you assess the profitability of the company and be able to estimate future value of its share price.

What should you be looking out for in an annual report as an Investor

First you have to read the chairman statement to have a general understanding of where the business is headed.  In reading this section of the Annual Report, seek to understand the company’s core business, how it make money, what iy produces, what it sells or what service it renders.

Other things you should be looking out for in the annual report are the quality of its management and how they are addressing risks or remaining true to what they claim they are

If, after reviewing the chairman’s statement which gives you an overview of the company’s profile, you remain unclear on how the company makes money, it is in your best interest to look for another company to invest in.

7 Important Informtion to Watch Out For In An Annual Report

A) Auditors’ Report –   check if the auditor’s reports give a clean bill of health to the financial statements.  A statement that the financial statements represent a true and fair view of the affairs of the company is a testimony to how well the company has been run in line with corporate governance and best practices code.

B) Review the financial statements and take note of the following:

1.Net profits: is it positive, is it growing and falling relative to previous year?

2.What is the company’s business, how does it make money. If this is not clearly stated, it is a red flag.

3. Turnover, sales and revenue: is this rising or falling relative to previous year?

4. Cash flow and working capital – are they adequate, increasing or falling?

5. Debt: is debt rising reducing. What is the ratio of debt to capital

6. Earnings –           is it positive, rising or falling?

7. Dividend payout: is it rising, falling or static as a percentage of profits

For any aspect that is declining instead of growing, find out why.

Steady falling margins and dependency on non-recurring gains are red flags.  Non-recurring gains are income from extra-ordinary activities, that is, activities that are not related to the main business of the company.  If a company that manufactures soap depends on the sale of its real estate property to boost its sales, then the company will not be in business for so long.

Fraudulent managers of companies can manipulate accounts to look so good to the investing public.  Watch out for if there is a change in account date.  If there is such a change, make further inquiries to understand the reason for the change.  Is it in compliance with a regulatory or government policy? Is it an industry practice at the time? Why? Change in accounting date that brings forward revenue and delays expense recognition may be a red flag. Investigate it.

Annual report represents mostly a review of historic events.  Make further investigations of any grey area and take note that a clean audit report does not necessarily guarantee that the company’s financial statements is free from manipulation.   Review the reports critically and if possible, seek clarifications from other sources to know if management is focused, are they consistent and are risks being addressed.

So you have it here. 

If you have not been taking interest in the Annual Reports the companies you invest in send you every year, you are doing yourself a disservice.  From now on start reading and analyzing these documents, they may be the key to your investing success.  If you are not good with numbers, don’t worry, just follow the simple techniques highlighted above and with time, you will find that you analyze companies like a pro.

To your investing success!

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Buchi provides small business owners with strategic, financial, and digital support to help them build strong, successful and profitable enterprises.

He is a Blogger at night and by day, Team Lead at Stalwart Investment Partners Ltd, a research, business and investment advisory firm.

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