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Message: <blockquote data-quote="sherlock" data-source="post: 10646735" data-attributes="member: 106046">How to read an Annual Report: How you read an annual report depends upon your purpose. As an investor, your purpose may be to assess profitability, growth, stability, dividends, potential problems, risks or other factors which may affect your investment in that company. The annual report provides a convenient way to monitor the progress of a company. If you own shares in the company you should receive a copy of their annual report in the mail from the company. Annual reports are a corporate "work of art" and should not be read like a normal book. There is no need to read the report cover to cover. The first pages are a colorful, non-technical overview of the company's objectives and how well it's meeting them. The pages in the back are for number-crunching and heavy-duty research. Receiving and reading annual reports together year to year creates a kind of timeline for the company. You can learn a lot by reading about how the company changed their business model or carried out their desired plans from one year to the next. There are nine sections in most annual reports. Not all reports will have all the sections or the same type and amount of information. Here are the sections, what you'll find in each, and questions you should ask yourself: • Letter from the Chairman: Should cover changing conditions, previous objectives met or missed and upcoming objectives, and actions taken or not to be taken. • 10 Year Summary of Financial Figures: Is this included? Have revenues and profits increased each year? • Management Discussion and Analysis: Is it a clear discussion of significant financial trends over the past few years? How candid and accurate is it? • Subsidiaries, Brands and Addresses: Where is their headquarters? Is it clear what lines, brand names the company has and what their overseas distribution network is? • List of Directors and Officers: How many directors? Are the directors well-known and respected? Are there an unusual number of directors (5 to 12 is typical)? • Financial Charts: Financial information over a period of years in graphical representation. • Financial Statements: Most of the information you’ll be concerned with in the annual report is located in the financial statements (the balance sheets, the cash flow statements, and the income statements), which are discussed in detail in the Financial Statements section, Notes to Financial Statements. • Stock Price History: General trend of price over time. Up or down? Financial Statements This is the most important section of the annual report. According to the CSE Listing Rules, a listed company shall prepare and circulate the Annual Report to the Exchange and to all Shareholders of quoted securities before the expiry of 06 months from the close of the financial year. These statements provide key information about the performance and financial health of the company. The following are the different financial statements that are disclosed in the annual report • Statement of Income • Balance Sheet • Statement of Cash Flows Income Statements The income statement (sometimes called the profit-and-loss statement or P&L) shows the revenue, expenses and profit for the company during the past year. You can use the income statement to figure out cash flow, profit margins, and other financial metrics for the business. Most importantly, the income statement contains the proverbial bottom line: profits. The statements are audited by outside firms, however, so there should be footnotes or other markers whenever anything deviates from standard accounting practices. The following list will teach you how to read an income statement and use the information from them to make some simple calculations regarding the firm's operations. • Revenues: The revenue section will tell you how much profit the company took in for a specified period of time. Sometimes companies will break down revenues according to business sector or geographic region, but usually there will just be one number. Some companies, especially retailers and manufacturers, use the term sales instead of revenues, but it's the same idea. • Expenses: The expense section will show you how the company spent its money. Companies spend their money on a lot of different activities, so this section is usually broken down into specific sub-sections. You might see expenses such as the following: o Cost of Sales: This number includes expenses directly associated with creating revenue, such as labor and materials. o Operating Expenses: This number includes activities such as marketing, research and development, and administration. It usually also includes depreciation expenses and any special non-recurring charges. o Interest Expenses: This figure includes all the interest the company paid out on its bonds (if any) and/or long-term debt. o Taxes: The amount of money paid as taxes by the firm. o Extraordinary Expenses: This figure shows any unusual or one-time charges that the firm must pay (e.g. a lawsuit settlement). • Profit: The profit section of the income report is the part to which investors pay the most attention. It shows whether the company made money or lost money. It usually includes these specific sections: o Net Income: This is the company’s bottom-line profit after all expenses and revenues have been accounted for. If this number is positive, then the company turned a profit for the period. If it’s negative, then the company suffered a loss. • Margins: You can find out how much a company is really earning from its revenues on the income sheet by calculating its margins, which are earnings expressed as a percentage of sales. Here are a few margins that you might find useful: o Gross Margins will tell you how much a company earns taking into consideration the costs that it incurs for producing its products and/or services. In other words, gross margin is equal to gross income divided by net sales, and is expressed as a percentage. Gross margin is a good indication of how profitable a company is at the most fundamental level. Companies with high gross margins will have a lot of money left over to spend on other business operations, such as research and development or marketing. o Net Margins are similar to gross margins, except they take into account all of the expenses associated with the business, including marketing expenses, administrative expenses, etc. (so it is equal to net income divided by net sales). Net margins provide an overall picture for the company; this is what shareholders and investors usually watch most carefully. Balance Sheets The second financial statement that you'll encounter in the annual report is the balance sheet. The basic concept underlying a balance sheet is simple enough: total assets equals total liabilities plus equity. A lot of investors tend to focus on the income statement, but the balance sheet is just as important a source of information. You can use the balance sheet to determine the firm's liquidity, to see how leveraged the company is, or just to see all the specific assets and liabilities of the company. The following list will teach you how to read a balance sheet and use the information from it to find out the company's current financial standing. • Current Assets are fixed assets on the balance sheet. Current assets are defined as assets that can or will be converted into cash quickly (generally within one year). Current assets include, of course, cash and cash equivalents (money market accounts, etc.), but it also includes the company's inventories (unsold stock) and its accounts receivable (uncollected bills from its debtors). • Current Liabilities are the opposite of current assets. They are the money that the company expects to pay out within the next year. Current liabilities include accounts payables (bills the company must pay), interest on long term debt, taxes, and dividends. • Non-Current Assets and Liabilities are assets that cannot be turned into cash quickly or liabilities that are not due for over a year, respectively. This includes assets such as the company's plants, property, and equipment, and liabilities like long-term loans. • Ratios and Other Calculations can be calculated to analyze the balance sheet, just like you can calculate several different types of margins to help you analyze a company's income statement. o Debt Equity Rate: The debt/asset ratio can show you what percentage of the company's assets are financed through debt. You can calculate it by taking total liabilities and dividing by total assets. If the ratio turns out to be less than one, then that means that most of the company's assets are financed through equity. If the ratio turns out to be greater than one, then the company is financing most of its assets through debt. Companies that have high ratios are said to be "highly leveraged." This means that they are carrying excessive amounts of debt and could be in danger if creditors start to demand repayment. o Current Ratio (depending on the industry): The current ratio is the opposite of the debt/asset ratio: it takes the total number of current assets owned by the company and divides by its total current liabilities. If this number is greater than one, then the company has enough current assets to cover its short term liabilities. A number that is much higher than one, however, might indicate that the company is hoarding its assets instead of putting them to use. A number less than one indicates that the company may experience problems with liquidity. o Shareholder Equity: Shareholder equity is equal to total assets minus total liabilities. This number shows you what part of the company is owned by the shareholders after all of its obligations have been met. o Working Capital: Working capital is calculated by subtracting the firm's current liabilities from its current assets. This number shows you how much in liquid assets the company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have lots of working capital will be more successful since they can expand and improve upon their operations. Companies with negative working capital may lack the funds necessary for growth. o Turnover Ratio: The turnover ratio is used to determine how many times a company "turns over" its inventory in a given year. It is calculated by taking the cost of goods sold and dividing by the average inventory for the period. A high turnover ratio is looked upon favorably because it is a sign that the company is producing and selling its goods or services very quickly. A low turnover ratio indicates that the company has large warehouses of inventory going unsold for long periods of time. o Leverage: Financial leverage is a measure of how much debt the company has assumed in order to finance its assets. It is calculated by dividing the amount of long-term debt carried by the company by the company's total equity. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. The important thing is to be able to differentiate between a healthy amount of debt for good purposes and too much debt for questionable purposes. Cash Flow Statements The cash flow statement is similar to the income statement, except that it dispenses with some of the abstract items found on the income statement (such as depreciation) and focuses on actual cash. Most of the information found on the cash flow statement is contained in either the income statement or the balance sheet, but here it is organized in such a way that it is difficult for companies to use accounting tricks to obscure the facts. The cash flow statement is broken down into three parts: • Cash Flows from Operating Activities: Here you'll find how much money the company received from its actual business operations. This does not include cash received from other sources, such as investments. To calculate the cash flow from operating activities, the company starts with net income (from the income statement), then adds back in any depreciation expenses, deferred taxes, accounts payable and accounts receivables, and charges. • Cash Flows from Investing Activities: This section shows how much money the company has received (or lost) from its investing activities. It includes money that the company has made (or lost) by investing its excess cash in different investments (stocks, bonds, etc), money the company has made (or lost) from buying or selling subsidiaries, and all the money the company has spent on its physical property, such as plants and equipment. • Cash Flow from Financing Activities: This is where the company reports the money that it took in and paid out in order to finance its activities. In other words, it calculates how much money the company spent or received from its stocks and bonds. This includes any dividend payments that the company made to its shareholders, any money that it made by selling new shares of stock to the public, any money it spent buying back shares of its stock from the public, any money it borrowed, and any money it used to repay money it had previously borrowed. • Free Cash Flow: While free cash flow doesn't receive as much publicity as earnings do, it is considered by some experts to be a better indicator of a company's bottom line. Free cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. It is quite possible, for example, for a company to have positive earnings and negative free cash flow. Negative free cash flow is not necessarily an indication of a bad company, however; many young companies tend to put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, you should probably be investigating why it is doing so and what sort of returns it is earning on its investments. Notes to Financial Statements This section provides explanations and backup for some of the numbers listed in the Consolidated Financial Statements. All significant items are explained in greater detail in this section. It includes the accounting methods used for the computation of different items such as Revenue recognition, Inventories, Fixed assets and depreciation, Investments, and Research & engineering expenses. As mentioned earlier, a detailed explanation of significant Unusual Items is provided. Various businesses acquired during the year are listed along with other pertinent information such as a breakdown of Fixed Assets, Long-Term Debt, details about Stock Compensation Plans, Income Tax Expense, Contingencies, Employee Benefit Plans, etc. Reconciliations of key financial numbers by our main business segments and also by geographic area are provided as well. This is the section that the analysts concentrate on to get a better understanding of the numbers provided in the Consolidated Financial Statements section. *************************************Source: Daily News Stock Market Column</blockquote>

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