Annual reports

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 annual report.

A proven track record

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.

Smart tip

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.

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 medical sector?

Valuable strategic acquisitions

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 business.

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 tangible results

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 no profits

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 costs

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 investors' shareholdings?

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 report

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 money.

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Last updated: 11 Dec 2018