Stockmarket.com.my

As the name suggests, annual reports are the formal documents of listed companies that are published yearly. The annual reports main function is to inform the potential investors and shareholders the situation on the company and how has it performed over the past year. 

Last time shareholders could only get their annual reports through the mail, however the Internet has made it more convenient for people to get them and not just people who invest in the companies’ anymore but also potential investors who want a clearer picture of the current situation of the company before investing. The respective websites of the companies should have the link for you to download the annual reports for free. So whether you are a current investor or potential investor, start getting those annual reports and do research so that you can make better investments.

From the annual reports you can get information that will allow you to evaluate the dividends, profitability, potential problems, stability, risks, survivability as well as other factors which may help you in deciding whether you should invest or not. A method that can be used is the key financial ratio which can be used to analyze the factors or the other option is the micro and macro-economic risk analysis.

Most of the annual reports that you see sometimes are more focused on the presentation rather than the actual information that is provided. The sometimes will be printed on fancy paper and includes photography to enhance the annual report. Such a tactic is used because they are usually used more as public relation tools to enhance the image of the company. So that is why you will see that the annual reports come in a variety of sizes and forms.

But above all you should be paying attention to what the company is telling you, these are the important information to look out for, which also includes what the company is planning to do and what it is currently doing.

It is illegal for companies if they do not provide true and factual information regarding the current situation of its company in the annual report. Even leaving key information is illegal because this information could help the investors make decisions regarding their investments. Despite the abundance of information that can be extracted from the annual reports, most of the shareholders that receive the annual reports will just flip through the pictures, look at the pretty pictures and design, skip the account and chuck it aside just like yesterday’s newspaper.

To honest reading the annual report is not an easy task and that is why annual reports do not get the attention that they deserve. Most of the readers get sensory overload just by looking at the annual reports and not to mention the amount of jargons one must master first before attempting to understand the annual report. As a matter of fact, one is usually required to read between the lines to actually get the information that will prove beneficial to their investment.

Like everything in life the most important thing is the first step, so do not be afraid when you look at the annual report. If you want to gain maximum profits in your investment you have to get started. While there is a standard way of presenting financial statements, if you are a beginner you have to above all get used to it. Once you start, you can be sure that you will start to understand what the annual reports are trying to tell you even though you did not understand it at first.

Please take note that you do not have to read from cover to cover of your annual report, the first few pages are for public relations purposes where they present colorful pages of the non-technical overview of the company’s main objective and their current progress in trying to achieve those objectives. For example the front section would most probably include the message from the company’s chairperson, messages to the shareholders, the company’s competitive positioning, products and strategies.

The back potion is where you should be focusing when trying to decipher the hidden messages found in the annual reports. This is where the information will help you in your future investments such as the notes and financial statements. So it is recommended that you read the annual report from back to front since the board of directors or their equivalent bodies are responsible for the preparation of the company’s annual report.

You must have a sharp eye when reading the company’s financial reports as you can learn a lot for example you can see how the company has carried out its objectives from year to year or rather how the company has changed its business model. Pay extra attention on the financial data with a critical eye. One thing you must remember is that despite problems such as declining cash flow and revenues not being mentioned in the chairman’s statement, they cannot be hidden in the financial statements, so that is a place to look when you are considering in investing in that company.

Here is a summary of what you should do when reading an annual report:

• Chairperson of the Board Letter – When reading this section of the annual report make sure that the statement by the chairperson covers the company’s goals that are going to be achieved, that has already been achieved or missed, the changing conditions as well as actions that were taken or not taken. How was the report written, again the one thing you should do when reading these financial statements is to read between the lines. For example when the company apologizes, don’t just think of it as a mere apology, try to understand why and what is the company apologizing about.
• Sales and Marketing – Other things that you need to find out in this portion of the annual report is what the company sells, where it is conducting its business, when and how is it doing it. When they talk about how the company makes money, is the information provided presented in a clear way? How about the scope of the operations, divisions and lines? Is this information clear and understandable?
• 10 Year Summary of Financial Figures – What about these information, are they included? If they are what is the growth of the company’s operating income and profits?
• Management Analysis and Discussion – Is the discussion of significant financial trends over the past two years clear? Another you have to make sure is how accurate and candid the discussion is.
• CPA Opinion Letter – The main thing to look at here is the type of qualifications that the particular CPA providing the opinion has. This is because the opinion of the company’s financial status is provided by them and if they are reputable you can take their opinion without feeling apprehensive.
• The Financial Statements – What you should be looking at in this particular section is the research and development spending, sales, inventory and debt levels over time as well as profits. The footnotes will help you filter out the other unwanted information so read that also.
• Subsidiaries, Brands and Addresses – Where is their headquarters located? How about the brand names, lines that the company has, are they clear and what is the overseas distribution network like?
• List of Directors and Officers – The key information you want to get here is whether the directors are respected and well-known. How many are there inside vs. outside directors? And the amount of them in one particular company, are there less than 5 or more than 12?
• Stock Price History – What is the general trend of that particular stock for that company; does it go up, down or fluctuates erratically? Other things to take into consideration are – which exchange are the company listed in, the dividend history and stock symbol.

And finally a note of warning to all current and potential investors who do research using the annual reports; not all annual reports are what they appear to be. So be careful.