Buying and selling stocks are easy, but the amount of research one puts into determines your profitability. One such place to find out more about a company current performance and future plans is through their annual reports. The sage of Omaha, Warren Buffett revealed that his success in investing comes from reading hundreds and hundreds of annual reports every year. If annual reports are this important, how do we go about understanding it and finding the information that we need. Today in part 1, I shall share a bit on how I dissect the annual report into digestible parts. In part 2, I will attempt to muster what little accounting knowledge I have to share with you how to look for specific measurements that indicates the health of the company through their financial statements.
In my sharing, I will use the FY 2015 Annual Report of AEM Holdings. You can download it here to follow along as I dissect the annual report.
1) Where to find a company’s Annual Report?
Any public listed company will have to file their annual report with the stock exchange. This report can be found either from the website of the stock exchange it is listed on or in the investor relations segment in the company’s website. Here’s an example of where you can find the annual reports for AEM Holdings.
2) What to do with the 100+ pages monster?!
Yup, a company annual report tends to be 100 over pages long! (At least in the case of SG companies) Don’t worry, not every part of the annual report is equally important. Locating the parts that give you what you need is more essential.
This is a typical contents page of a company’s annual report. It is almost a standard format of annual reports which is comparable to many other companies’.
3) What information is important to me?
When analysing a company’s annual report there are always some standard information that is important to a shareholder. This can range from their financial performance to who exactly is running the company. Below are some information which I always look out for when I read a company’s annual report.
- Present company’s performance
- Company’s outlook and future catalysts
- Management’s information
4) Where to find these information?
Present company’s performance
We want to understand how the company is doing for the past financial year and most importantly their financial statements for the FY. This information can usually be found in 1) The Chairman’s and CEO’s statement, 2) Business and Financial Review (some company may name it differently but it is basically just a summary of financial figures for the FY), 3) The full financial statement in corporate information
Here’s a snippet of the present performance by the Chairman. You can likewise find the same from the CEO in the next page.
Under the business and financial review, the company tends to show a quick summary of financial performance for the FY. They can come in the form of informative illustrations comparing their performance over the past few FYs. I tend to read this part with a pinch of salt. This is because the company may tend to cherry-picked “nicer” numbers to put here to impress shareholders. A in depth analysis into their full financial statement in the corporate information segment is needed to determine the reliability of their performance.
If you are lost. You can find the above information from page 36, 40 and 37 respectively. A financial statement usually includes the Balance Sheet, Income Statement and Cash Flow statement. I will touch on these in part 2, but just know that these 3 pages are one of the most important part of any Annual Report. You will also notice one whole bulk of information which occupies majority of the annual report in Notes to Financial Statement. Basically this part give additional pointers to how each segment in the financial statement were derived.
Company’s outlook and future catalysts
You can usually find a company’s future plans and outlook from the Chairman’s and CEO statements. This is usually found at the last few paragraphs of their statements. They will address challenges and the strategies going forward. Any upcoming plans are also explained here.
During the FY 2016, you can stay tune to their announcements as they may announce some information about whatever plans they were set out to do in FY 2015. This can supplement your information about the company’s outlook and plans.
It is always important for me to know who are the people that are running the company. To find this information, you can look them up in the portion Board of Directors.
They usually include a short write up about the achievements of the person and his previous experiences.
Knowing how much the management is earning is also important. This is because we want to ensure that the management have their interests aligned to ours’ and are not overpaying themselves. You can find out details about remuneration in Corporate Governance on page 23 of the annual report.
In a board of any company, it is made up of the Chairman, CEO, the independent directors and some other position depending on the company. The independent directors are just people who are not related to the company but sitting in the board. This ensures that the Board do not do things that are beneficial to themselves only and in turn harming the shareholders. It is a common sight to have independent directors in any listed company. You should pay close attention to the payslip of the Chairman and CEO. Make sure they do not give themselves too high a pay.
One simple way to see if the Chairman and CEO have interests aligned to the shareholders is to see if they hold the company’s shares. You can find that either from the variable bonus component in the remuneration package above or from page 92, Information on Shareholdings.
The CEO is one of the top 20 shareholders of the company’s shares. If the insiders of the company have rather large stakes in the company they should act in the interests of the shareholders.
these are usually the information that I look for when I read into any companies’ annual report. By categorising the annual report into 3 key areas, we can effectively understand the company. In the next part, I will mainly talk about how to break down the financial statement in the annual report to help you understand some accounting jargon. Ohh and on the side note, if you have been a regular reader of this site, please do subscribe so I know roughly how many active readers I have and you can also comment below if there are any queries. Hahaha! Thank you! 🙂