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How to Find Winning Companies – Part 5

Hey there! Welcome to the fifth and final part of the series on using an annual report to find a winning investment.

As a recap: In order to find the best share to invest in, you have to gain an understanding of the company first. And one way to do so is through reading the company’s annual report.

You can catch up on the previous four articles in the series: Part OneTwoThree, and Four.

In the fourth article, I shared a few tips on how you could look through the financials of a company. In this article, let’s round it off with a few more points.

We’ll continue to use land transport giant ComfortDelGro Corporation Limited (SGX: C52) as an example. You can find the company’s latest (2013) annual report here.

Management compensation and ownership

It’s worth checking out management’s ownership in the company and how their compensation is structured.

On the compensation side, we can look to the Corporate Governance section of the annual report which starts from Page 51. Here’s a snippet on how management is compensated:

“The remuneration packages of the MD/Group CEO and executives of the Group comprise fixed and variable components. The variable component in the form of yearend performance bonuses, forms a significant proportion of the remuneration packages and is dependent on the profitability of the Group and individual performance. Subject to market conditions and the operating environment, the Group targets a total compensation package with fixed to variable component ratios of 70:30 for rank and file employees, 60:40 for middle management staff and 50:50 for senior management staff.”

Beyond that, it would be helpful to know if the management team are eating their own cooking.  Or put another way, does management own a notable stake in their own company? Such information is available from Page 70 onwards.

In there, we can see that Chief Executive Officer Kua Hong Pak had 324,530 in ordinary shares and 7,200,000 in options to subscribe (as at 21 January 2014). At ComfortDelGro’s closing price of S$2.98 yesterday, Kua’s holdings (assuming there have been no changes) comes in at a little under S$1 million.

Risks

There is also a section in the annual report where the company lists out potential risks to its business. This can be found on Page 60. Here’s a relevant risk to keep in mind:

“The businesses within the Group operate in regulated environment in different countries. These regulations include pricing, service standards, licences to operate and transport policies, which are stipulated by the relevant regulatory authorities.”

As it is with any business, ComfortDelGro operates under different regulations for different countries. That’s something to keep in mind.

With that, let me jump off to a different point before I wrap it all up.

Let’s keep in mind that as long-term investors, we’d be following the companies we own for many years and we’d certainly be reading more than one company report. There is always more to learn about a company over time as it navigates through different economic cycles and operating conditions.

Finally, this concludes the “How To Find Winning Companies” series. I hope you enjoyed it. Fool on!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.