It is the time of the financial year that listed and unquoted companies start holding their annual general meetings.
Once in a while I attend these meetings and find it unusual that shareholders ask non-financial related questions, mostly on the give away (touches, umbrellas, lunch boxes and poor quality T-shirts).
Due to lack of financial analytical skills, shareholders cannot analyse the annual reports. Here I shall elaborate this topic.
A company’s annual reports is the single most important way for it to communicate to current and potential investors. As such, it should come as no surprise that an annual report serves to present the company in the best light.
Investors should read annual reports with skepticism.
You should first read item 1, which is the business description. If you know the business first, you can then determine if you need to go any further.
That determination is simple. Just ask yourself if you understand what the company does, who its customers are, and the industry it operates in. If you answer no, you’re done. Move on.
The report contains a narrative written by top management. Known as the “management discussion and analysis” section, it summarises the firm’s financial position.
It focuses on the firm’s ability to pay its current debts. Executives provide an explanation of the company’s sales revenue and its capacity to afford growth.
A major part summarises the company’s opportunities and threats. Some of management’s opinions and subjective predictions should be analysed.
The heart of a the report is its financial statements. A balance sheet, the statement of cash flows, the retained earnings statement and the income statement are included in this section.
The balance sheet shows a company’s assets, its liabilities and stockholders’ equity. A statement of cash flows shows how much a company earns from various activities.
The financial statements provide insight into its liquidity. A negative cash flow from operations means the firm is not making income from sales.
Higher net cash flows from financing activities reveal the company may be borrowing too much. The income statement shows if operational expenses are higher than sales revenue.
A balance sheet will reveal if a majority of the company’s assets are short-term or long-term. Directors can convert short-term assets into cash quicker than long-term assets.
A higher amount of short-term assets, such as accounts receivable, means short-term debts are more likely to be paid.
Annual reports contain a report by an independent auditor. Within the auditor’s report, he will include a statement that says the company’s financial statements are fair and accurate.
That statement is called an “unqualified opinion.” If the auditor does not give an “unqualified opinion,” readers of the annual report should regard the statements with suspicion.
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Note: The results are not exact but very close to the actual.
