Let's Read a Company Annual Report... Together!
By Acceler8now.com Stock Investing Team,
November 29, 2007
If you are like most shareholders, reading the company annual report is not your forte. You possibly don't bother about them and will readily dump them as soon as you receive them in your mail.
Question to Ask
One question to consider for a moment is: "If annual reports were not important, why was a statutory provision made to compel companies to issue these relatively detailed reports on their operations?" Those statutory requirements, it must be appreciated, were designed to aid investors and protect their interest. Our reluctance to burrow into them may entail loss of vital investor information. Granted that experiences like those at Enron, Worldcom and our own Cadbury Nigeria would tend to taint the value of published financial statements, the fact remains that they provide invaluable insight, in most cases. More importantly, company annual reports contain a lot of investor briefs and explanatory insight that a serious investor shouldn't deny himself. Get this point: no matter the investment strategy you apply, the investor that knows and understands a given company more always has an extra edge regarding investing in that company.
A walk-through
To explore the investment information value of the annual report, lets quickly walk through one company report. I have the 2006 Oando Plc Annual Report and Financial Statements. Oando was just handy; no special reason for picking it. Flipping through, these are what I consider the most important sections, equivalents of which can also be found in most company reports:
- Directors and Professional Advisers (page 2)
A snapshot information page listing the directors, Auditors, Registrars, bankers, etc. The Board is important to an investor because it shows the quality of the team that shapes policy. In placing reliance on the company's systems and reports, you want to assess the calibre of the audit firm. An investor is likely to need the services of the registrar, someday. Having these facts only strenghtens your judgement.
- Results at a Glance (page 5)
Another snapshot page, showing key performance highlights and comparative figures for the previous year. Turnover, PBT, PAT, EPS, DPS, dividend cover, net assets per share are some of the indices. These are quick figures that are of interest to the investor. Though a 'rate-of-change' column is not provided, it's easy to calculate how these figures trended over the two years.
- Chairman's Statement (page 6)
First, it gives an appraisal of the macro-economic environment during the report year. It progresses to a review of the companies performance, highlighting such important milestones as the launch of company's Project Synergy, rollout of new branch structure for the marketing division, etc. More importantly, it delves into the outlook for the next financial year: strategic focus for gas and power, expansion of existing product service lines of Energy Services business, promotion of drilling rigs business, pursuit of new refining opportunities, etc. In all, vital information for any current or intending investor.
- Group Chief Executive's Report (page 9)
This section provides a more detailed and carefully laid-out presentation of what the company has been doing and its strategic direction for the future. It explains the 'LPG' tripod objectives of the company and highlights major restructuring processes executed to strengthen internal framework. It delves into business performance review for divisions: Oando Marketing, Oando Trading, Oando Energy Services, Oando Refining, Oando Gas and Power and Oando Exploration and Production. The performance analysis, stretching through some six pages, is an in depth review of each business units 2006 activities, its accomplishments and its strategic focus for future success. The information is well-organised and evidently carefully documented, providing investors elaborate insight into the revenue creation strategies of the company.
- Report of the Directors (page 20)
Equally quite informative. Detailed profiles of directors is provided as well as their ownership interests. Other corporate governance disclosures are also provided.
- Auditor's Report (page 38)
Follows the standard audit report format. Note however, that it's of interest to check if a company's audit report has any qualification (reservations) by the auditor.
- Financial Statements (page 39)
This is the number-crunching section of the annual report. Before this section, a lot of information is already available which non-numerate readers will draw a lot of value from. The financials cover the balance sheet, profit and loss account, statement of cash flow, the explanatory notes, a five-year financial summary and a statement
of value-added. They provide a lot of data for financial analysis. Along with the non-quantitative information, investor insight is deepened.
- Unclaimed Dividend Information (page 67)
This section summarises the unclaimed dividends position. As has been the trend for most companies, a lot of unclaimed investor's dividends, stretching over several financial years, has accumulated to over N600 million, as at the time of the report. You must wonder why a lot of dividend, running into billions of Naira marketwide, goes unclaimed.
What to Learn
Well, its all there. These annual reports are really a good information package for the investor and should be read. Next time, don't just dump them, since reading through does arm you with valuable insight into the business and strategic direction of the business and that should help your investing strategy. Information is the basis of the business of stock (even other) investing. You need information on current market developments and what relates to a particular company. What you must understand, too, is that much of the today's 'breaking news' would have had its seed in previously reported information probably overlooked. Your overall control and command over your investment process will benefit immensely from information you pick (and analyse) about the companies and the annual report is one good source. Even when not comfortable with numbers, the prose sections of the report are still loaded with rich information for your benefit.
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