Keeping watch on company performance is a key element in investing. One way is to analyse their annual reports. Here’s how to do so.
So you have invested in a company and bought some shares. The next step is to monitor how your company is doing. There are, of course, the quarterly or half-yearly financial updates. But every year, all listed companies on the Singapore Exchange (SGX) are obliged to publish an annual report, which provides detailed information on how the company has done over the past year.
The annual report is released after each financial year, and listed companies must make it available to shareholders at least 14 days before their annual general meeting.
According to SGX, the annual report should have enough data “for a proper understanding of the performance and financial conditions of the issuer and its principal subsidiaries”.
This is a key document that can stretch to more than a hundred pages, with thousands of numbers and even more words. With so much to sieve through, we outline a few key things you should pay attention to in the annual report.
1. Chairman’s statement
The chairman’s statement comes first in the annual report. Read this not just to find out about the company’s financial performance, but also for its outlook and business strategy. Pay attention to risk factors and expansion plans. Compare the statements over the years to get a fair sense of where the company is headed.
You can also attend their annual general meetings to seek the management and the board for their views on key issues relating to the company.
2. Financial highlights
It goes without saying that assessing individual companies’ income and profit levels is paramount. This can be found in the financial highlights section. It offers a range of financial metrics and forms the bulk of the annual report, which can take hours to look through.
To simplify matters, pay attention to a few key metrics such as the following financial ratios:
1. Net profits – the profit that remains after all expenses and costs have been subtracted from revenue
2. Revenue growth – the amount a company makes in a time period compared to an earlier period
3. Cash flow per share – a company’s cash flow divided by shares the company has listed on the stock market
4. Debt levels – a measure of how much outstanding debt the company has. Pay special attention to the amount of debt outstanding relative to total assets or equity.
3. Corporate governance
The annual report also has to detail information such as executive remuneration and related-party transactions. It’s important to scan these sections to understand how the company is managing corporate governance. Are they paying their management too much relative to their industry peers?
Carrying out background checks on companies’ Boards of Directors is another element that will prove helpful. This is to understand their objectives and if they have the capabilities to provide relevant inputs to help the companies realise their business goals.
A stepping stone to better investment decisions
It may be daunting to pick up annual reports to find what you need to know about your planned investment decisions, but making sense of these key components will be worth your time and investment.
the bottom line:
Annual report reading is a skill anyone can pick up. Be among the experts to make opportune investment decisions.
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