Digesting The Annual Report Sans Heartburn

Foreword from ShareInvestor

This article “Digesting The Annual Report Sans Heartburn” by Chen HuiFen was first published in The Business Times on 05 Nov 2007 and is reproduced in this blog in its entirety.

That 200-page tome given out every year might be thicker than some textbooks. Join CHEN HUIFEN on a walkthrough to get the most out of it

WHAT does one do with the annual reports piling up in the mailbox? Chuck them aside, tear the pages to hold your dinner waste, or just snip out the proxy forms for a free lunch at the annual general meeting?

The annual report is one of the most important documents for a company. Many listed firms put plenty of effort into producing it. It is not a mere exercise in meeting a regulatory requirement. Done properly, annual reports serve to communicate important information to shareholders, potential investors and even customers in general.

For readers of annual reports, the reports offer a summary and update of the company’s doings in the past year. It’s also a quick guide on its business and how it fared in the previous year.

However, annual reports should not be the only research tool used. After all, they can also be a marketing platform – it is only natural that companies want to trumpet their achievements and play down the bad news, especially when it comes to their most scrutinised publication.

Bear in mind that by the time the report is printed, there may already be new developments in the company.

For the newbie, Young Investors’ Forum offers some tips on how to get started with those glossy pages in annual reports, some of which run into a few hundred pages.

In this first of two instalments on understanding the annual report, we focus on parsing the text for vital information. We’ll discuss the numbers in the other instalment.

Access

How does one get a copy of a company’s annual reports?

Shareholders of listed companies ought to receive a copy within a few months of the end of a company’s financial year. However, this is not automatic if the shareholder owns shares in a company through funds.

Companies with investor relations department may accede to requests for a copy if asked. Otherwise, try the Singapore Exchange website (www.sgx.com). Move your mouse over the “Listed Companies” tab and you will see “Annual report/Fin Report”. Click on that and you will come to a page listing all the letters of the alphabet. The soft copies of the annual reports are organised according to the first letter of a company’s name.

Investors can also search for a company’s official website. Annual reports, in PDF format, are usually available there.

Qualitative Analysis

The first part of the annual report usually consists of qualitative information, such as the business philosophy, and the corporate mission. Read the message by the chairman or chief executive, as it typically gives a review of the company’s progress, including milestones, key deals, problems encountered and measures to manage them, and the business leader’s views on the outlook for the company or industry.

Very often, the report will also include an introduction to the board of directors as well as its management team. That will give a rough idea of what each is responsible for, his/her experience and qualifications, and sometimes achievements and contributions to the company.

Compare the information with that disclosed by others in the industry. Do all firms face similar challenges? How does this company’s strategy fare in relation to that of its competitors? What is the quality of the board composition and management talent?

It may also be useful to compare the annual report with previous reports of the company, to note any key trends and changes in the company’s development.

For example, is the company saying the same things it did last year? Did it execute the plans it had spelt out previously? If not, did they explain what got in the way? What about the management team? Have there been any significant changes?

After reading the annual report, decide for yourself if it was a thoughtful, informative report. Did it give you insights into the company’s operations? Did the company specify its goals, and the strategies it will take, or is embarking on, to meet those goals?

Auditors’ Report

Unless a company has obtained audit exemption, an auditors’ report is an important requirement of any listed firm. Written by an independent firm of certified public accountants, the auditors’ report is meant to provide opinions of a company’s financial statements. It should outline whether the financial data are true and fair, and if the accounting methods comply with Singapore Financial Reporting Standards and the Singapore Companies Act during the period.

Remuneration

The annual report also lists the directors’ pay, typically in bands of $250,000. This usually consists of a fixed remuneration, a performance bonus component and possibly share options as well. Directors’ pay should reflect the company’s financial results. If things had gone well during the year, a fat pay package would not be cause for concern. But if results were poor, look to see if any special circumstances were behind the bumper bonuses, then decide if those were justified.