Report cards for companies
A company's annual report is one of many sources of information
you can use to judge the performance of the company and decide
whether you should buy or sell their shares.
Here are some suggestions on things you should look for in an
A proven track record
The annual report should tell you how the company performed over
the past year and any new developments that may affect its
performance in the next few years.
Check that the activities detailed in the current annual report
are the same as what the company said it was going to do in the
previous year's report.
For example, is the current strategy the same as described in
the previous report or statement? If it has changed, how will it
affect the performance of your investment?
Consider also the ultimate goals of the company. Are its
activities moving towards these goals? For instance, did the
company say it would develop computer software for the banking
industry, but is now considering biotechnology software for the
In some cases, 'strategic acquisitions' detract from shareholder
value. If the company is expanding by buying other businesses, look
at the impact and check to see if it will add value to the
For example, does the new acquisition provide access to
additional markets, new technologies or new products? This could
affect the share price.
Research spent on getting
Check if money spent on research and development activities has
led to a tangible result, such as the first sale of a software
application or production of a high technology product. This also
includes entering into an agreement with another business to use
the technology it developed.
Profits or a good reason why
When reviewing the financial results, look at the actual revenue
of the company and where it came from. Did the company make a
profit or a loss? If it was a loss, did the directors explain why?
Many companies do not make a profit during their 'start-up' phase.
If this is the case, the directors may indicate in the annual
report when they expect the company will make a profit.
Cash to pay for operating
Take a look at the cash flows in the accounts. Has the company
only used its own money or has it borrowed additional funds, either
through loans or by issuing convertible notes (debt securities that
can be converted to shares at a later stage)? If the company has
issued more shares during the year, have these diluted existing
Enough cash to last
If the company is not yet generating cash from its operations,
see where cash is being spent and the rate at which it is being
spent. Assess whether the company will have enough cash on hand
until revenue begins to be generated.
If it won't have enough cash on hand, how will the company meet
its requirements? Will it try to raise more funds from investors or
will it borrow the money?
Getting a copy of an annual
Annual reports are usually available on a company's website for
download and this is the easiest way to access them. Most
companies will send a printed copy of their annual report if you
request it, but it depends on the organisation. If you are unsure,
contact the company directly.
Think of the annual report as a report
card for companies. By reviewing its performance over the past
financial year, you can decide whether the company deserves your
support, or if it's time to look for somewhere else to put your
Last updated: 18 Aug 2015