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3 Areas To Look Out For When Reading Annual Reports

Annual reports are thick, chunky documents and can be huge, cumbersome monsters to read through in detail. So what are the more important aspects within annual reports to focus on so that we can minimise information overload? Let us look at three of these.

Where to look

An annual report is normally deemed as a marketing document issued by listed companies, as the report is a mandatory requirement by the stock exchange, and is probably the only major report produced for investors and shareholders annually. It is therefore necessary to look past the gloss and hype, and dive into the real “meat” of the report. These are, in no particular order of importance, the Chairman’s Statement, the MD&A (Management Discussion and Analysis) section, and also the Remuneration and Corporate Governance report.

The leader’s letter

The Chairman (or CEO) Statement would provide a good summary of the achievements and failures of a company during the fiscal year, and also the company’s plans and strategies to grow its market share, revenues, and profits.

Pay particular attention to the tone of the statement as it would reveal if a company’s management is evasive or candid, open to admitting mistakes, or prone to sweeping mistakes under the carpet. Some chairmen also tend to make promises in earlier years which they are unable to fulfill given a change in market or industry conditions – these should ideally be flagged out and discussed openly, along with concrete plans on how to staunch the decline. Some CEOs of well-run companies have been known to be very candid in their statements, as well as using realistic and guarded language; in other words, these CEOs tend to under-promise and over-deliver.

What management says

The MD&A section gives a post-mortem on how the business fared overall in the fiscal year, and it would usually be accompanied by divisional performance breakdowns as well. There is usually good clarity on how each business division is doing, with important numbers such as revenue growth and margins, and the section would also come with commentary on the company’s overall business conditions and plans and strategies for tackling difficulties and growing the business.

The MD&A section of a company’s annual report provides very useful information for us as investors, and we can garner extensive information on the company just by reading through this section thoroughly, along with the MD&A sections for competitors.

How management is paid

The Remuneration and Corporate Governance report would give details on the remuneration bands for a company’s directors and senior management. It’s important to note that some executives may be paid much higher than others as a percentage of the company’s revenue or net profit. As investors, we may want to question if a company’s remuneration for its management is excessive, especially if the company is facing challenging times or a decline in profits.

The Corporate Governance Report shows the number of board meetings held during the fiscal year and the total number of meetings attended by each director and senior management. Look out for red flags such as directors hardly turning up for meetings, which may signal their lack of interest in contributing to the company’s business strategies.

Wrapping it up

The above are three aspects of an annual report which we should focus on. But ideally, the rest of the annual report should also be read thoroughly to glean further insights.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.