Understanding Annual Reports
One of the 9 steps to financial freedom?
Understanding annual reports may allow you to take one of the 9 steps to financial freedom.
The annual report format follows a similar line for most company reports.
Although annual reports design may vary significantly depending on how austere or flamboyant the company wished to present its reports.
The three financial statements included in all reports include the income statement and balance sheet, as well as a statement of cash flows.
Interactive annual reports can be usually accessed from the company's website or from the relevant stock exchange. You can also order annual reports from most company offices. If you are a shareholder, you should receive one free in one form or another.
Some annual reports, such as the Berkshire Hathaway annual report, are received at the annual general meeting with great enthusiasm, given the reputations of the two presenters, Charlie Munger and Warren Buffett.
The company CEO and Chairman of the Board present reports as part of the annual report. There are also reports from the remuneration committee as well as from the auditors.
Annual Report Concerns
It is important to read the Auditor's Report to see if the auditor has raised any concerns or 'qualifications'. These concerns may point to future downturns in the company's operations
I find it somewhat concerning that the Remuneration Committee Report, that outlines payments to board members and senior officers in the company, often constitutes a large section of some annual reports.
It says something about what some senior company officers judge as being important in company reporting.
The complexity of some remuneration reports are bizarre and beyond my comprehension and offer little assistance in understanding annual reports. That is why I often vote against them.
I like to compare the latest annual report to reports from the last few years to see to what extent the previous statements of intent by the CEO and Chairman have been achieved.
The better companies make this explicit in their current report. The less successful companies don't wish to be reminded of their previous utterances.
I also like to see frequent references to shareholders and shareholder value in the annual report. It enables me to judge to what extent the company is shareholder focused.
AFTER ALL, THE SHAREHOLDERS ARE THE OWNERS OF THE COMPANY. THEY DESERVE A MENTION!
Much of the detail in annual reports are in the 'Notes to the Financial Statements' section of the reports. This is where some of the skeletons are buried and hidden in small print from the public eye. Referring to these notes may reveal valuable insights.
Understanding annual reports should not be a difficult exercise, or be made more difficult by the company. However, it is the three financial statements in the report that demand most of my attention and analytical skills.
The related articles below examine the importance of each of the financial statements in the annual report in more detail.
The statement of income - or profit and loss statement, or statement of company performance, is the best place to find out where the company's money is coming from and going to. There are four key areas in the income statement that value investors need to be aware of.
The balance sheet - provides a snapshot in time of the company's liquidity and solvency. I have outlined three key areas that value investors need to check in this statement.
The statement of cash flows - provides the best measure of the flow of cash into and out of a company for a particular time period. Cash flow is the life blood of any business and free cash flow is a figure that value investors should keep a close eye on.
Return from Understanding Annual Reports to Analyzing Financial Statements
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