What annual reports tell you about a companyWhat annual reports tell you about a company

Annual reports are a detailed review of how the year went for a company. They have information you may use for your due diligence, like how much money the company made, their strategy for the future, and who’s on the executive team. They’re also a way for you to follow the performance of companies you’ve already invested in.

In this blog post, we’re going to give some tips on the things you might want to look out for in a company’s annual report. Let’s dive in!

First up, where to find annual reports

You can generally find a company’s annual report in two places:

• the company’s website—usually in a section called something like ‘investor’, ‘investor centre’, or ‘investor relations’

• an exchange’s website (like the Australian Securities Exchange)—usually on the company’s page.

Now let’s get into the details. There are usually four main things to look out for: the numbers, the strategy, the risks, and the team.

The numbers

There are a few notable numbers to look out for in financial statements. These include the raw details of the business—things like how much money they made, how much money they spent, and how many assets they own.

Income statements

The income statements show you how much money the company made (revenue) and how much they spent (expenses)—and what they spent that money on. They’ll also show you whether a company has made a profit or not, and if it has, how much profit it’s making.

Of course, not all companies make a profit! Some companies deliberately choose to spend money on growth instead of profit. And other companies try to make a profit, but end up with a loss anyway. Either way, it can sometimes be useful to know whether they’re making a profit, and how large that profit is. And if it’s not making a profit, it could be worth finding out how much of a loss it made.

Cash flow statements

Cash flow statements show you how much cash a company has made, where it’s come from, and where it went. This is slightly different from income statements because income statements show you how much money has been promised. The cash flow statement shows how much money has actually gone into (and out of) the company’s bank account.

Balance sheets

Balance sheets show you the assets, liabilities, and equity a company has.

Assets include things like:

• money in bank accounts

• money owed to the company

• property the company owns.

Liabilities includes things like:

• money owed to banks

• taxes owed

• money owed to employees or other parties.

When you subtract the total value of the liabilities from the assets, you get the working capital.

One way you might get some context around these numbers is to compare similar companies and benchmark them against one another. You could also compare these numbers to the same numbers from previous years, to get an idea of growth (or shrinkage!).

The strategy

You can find the company’s overall strategy in the letters from the chief executive officer (CEO) and Chair at the beginning of the annual report. If you want more detail, you can look at the investor presentation, which is generally a separate document that usually comes out around the same time as the annual report.

Strategy is important because it gives insight into the direction the company is gearing towards and what the company plans on doing in the future.

How quickly does the company expect to grow?

Some companies might choose to invest their profits into the growth of the company. This could mean less profit today in exchange for a shot at potentially higher returns in the future.

Other companies might slowly and steadily grow, making higher profit in the short term, while potentially sacrificing the opportunity to grow as quickly as they could have. Most companies will fall somewhere in between these two extremes.

How does the company plan to support growth?

A company’s plan to grow paints a picture of what it expects to look like in a year or more.

While some companies may grow faster than others, look at how a company intends to do so. Will it be expanding into new markets? Will it be finding ways to sell more things to existing customers? Will it be acquiring new businesses? How will the company control costs?

Costs are another key part of strategy. Most companies look for ways to keep their costs down as they grow, and make sure they’re spending money on the right things.

Look at how a company plans on doing this:

• Will they be restructuring?

• Outsourcing some things?

• Investing in new technologies?

An investment is, at its core, an investment in a company’s future. For that reason, it can be useful to know how the company plans on getting there.

Alongside the strategy for the future, you’ll also find an update on what’s happened in the past. You might want to compare this to earlier reports, and see how well it matches up. Does this company have a track record of doing what it says it’ll do? If not, what stopped it from doing so?

The risks

The other side of the strategy is the risks the company faces.

Risks are a good counterbalance to strategy because strategy shows where the company sees itself in the future. The risks give you an idea of what kind of things may stop it from getting there. These two pieces of information can help you with your due diligence.

The team

Finally, it can be useful to look at who’s in charge. Company reports tell you who is on the board, and who the top executives are.

These people are ultimately in charge of the company’s direction, and with it your investment—so take a look at their bios in the annual report. You might like to Google them too! You may want to ask yourself if the backgrounds of the management team are consistent with your values.

It’s useful to do this after you read about the strategy and risks. Once you have your head around the strategy, you can ask yourself if the management and governance teams have the skills to execute on that strategy.

Wrapping up

Corporate reports can be long and hard to decipher if you try to read them from front to back. It might be easier to focus on a few key things—the numbers, the strategy, the risks, and the team—to help you get a general picture of the company. Doing your pre-reading can help you become a more informed investor, without getting overwhelmed.