There are several things you should know when it comes to reading a company's annual report. Your can learn more by clicking here.
Has it reached that time of year again for the annual report? Do you sit there, staring at the screen, unsure of what it is in front of you?
Have you ever owned a Rubik’s cube? You could see a Rubik’s cube as the same as an annual report.
You know the premise of what you need to do, but it’s tough to get there. You may even wish to launch both across the room at some point.
There are several things you should know when it comes to reading a company’s annual report. You can learn more below.
1. Get Your Head in the Game
In the immortal words of Zac Efron, Get’cha head in the game. You don’t have to be a genius to read a company’s annual report. But, you do need to get in the right mind frame for it.
It’s easy to locate the essential points on the report. First, look at the bottom line of the income statement and find the profit amount. Compare that number with the financial statement sections.
If your total is nothing, then that is your profit for the past year. Which I think you will agree is not a good thing. If your total is less than zero, maybe this article will help.
As long as you are in the right mind frame, you can come to this figure quickly. Don’t let the sight of a large amount of numbers scare you into burying your head in the sand.
2. Make Your Plan of Action
The amount of information in an annual report varies depending on the company’s business sector.
For example, Private Sector companies will have minimal information available. Public Sector companies will have a lot more available for you to look through.
If you aim to focus on the data in a financial report, focus on the financial report’s data. Don’t let yourself get sidetracked as you would on Youtube.
You don’t need to know how great the CEO thinks they are or who their scapegoat is this year. Some extra information will help you, but not all of it. Figure out your plan of action and stick to it.
3. Learn the Lingo
When it comes time to read an annual report, understanding the different terms will help. When the reports are made, the creators assume you know what they are talking about within them.
Take going on holiday for example. Go to a country that speaks a different language. At first, it may seem like the residents are shouting random noises at you.
This situation happened to me once. I may have cried afterward.
Learning a basic understanding of the language would have saved me from tears. It’s the same with reading the annual report.
4. How Much Are You Actually Making?
A company’s profit is the most significant aspect of tracking progress. The aim is to keep your expenses less than your revenue.
You can find the sales revenue along the top of the report. Is it better than last year?
What is the gross margin ratio? To find your gross margin, take your net sales and minus the costs of goods sold.
Are these figures better or worse than last year? Having a steady rise of statistics shows a company’s growth.
Same as a baby is expected to grow. If it doesn’t grow into a toddler, that would be weird.
5. Make the Comparisons
Do you own shares in a company and want to know how rich they can make you? Below the section with the total profit number, it reports the earnings per share (EPS).
The EPS is the bottom line profit for each share of the company. Public companies have to state this. Whereas, Private companies do not.
To work out the EPS of a Private company, divide the net income by how many shares are owned by investors. It’s so easy to work out. I don’t know why they don’t just include it in the report.
Compare the EPS against the companies common equity shows you the Book Value Per Share (BVPS). The BVPS will show you the company’s net value.
6. Look Into the 'Stand Outs'
Can you spot any unusual gains that you didn’t expect? Before you get too excited and plan a party to celebrate, look if there are any notable losses.
Was this loss a one-off, or was it recurring? If it was a single occurrence, then you could put this down to an unexpected payout. Such payouts as a lawsuit or a new pinball machine for the office.
Ok, maybe not the pinball machine. Maybe you would prefer a Jukebox.
Whereas if the loss is a common occurrence, this could be worrying. You will need to investigate these spikes in numbers.
7. Is Your Cash Flowing?
A company wants to make a profit year on year. The quicker the profit is made, the more cash flow is generated.
Companies can create cash flow by selling their assets to bring cash to the company. But, a far better way to increase the cash flow is through profit.
The higher the cash flow, the more the company can spend it on. Such as that new pinball machine.
8. Financial Damsel in Distress
Companies can look great on paper. But, in the real world, this may not be the case.
Companies can also have a high net value. But, they can still struggle to gain a high enough cash flow to pay the bills on time.
We were all young once. Most of us will remember scraping the barrel to get enough money to pay rent.
If this is the case, the Solvency Analysis will show it. Solvency is how likely the company will pay its debts on time.
9. Any Lawbreakers?
Have you noticed a company restates its report? If so, there is a chance they have had to do it due to fraudulent accounting.
If Wolf of Wall Street taught me anything, it’s that frauds get caught.
Look further into this situation. Don’t risk losing money.
10. Know Your Limits
Do you use annual reports for your investment portfolio? It would be best to remember that even the best annual report is based on estimates and predictions.
Look over everything you have learned in this article. Use this information to give you a more clear choice on how you choose to invest.
Know your limits. Accept that the limitation of these reports may not be significant. Do the best you can with what you have.
Company's Annual Report ... Completed It Mate
Now you know how to read a company’s annual report. You can now learn all the juicy gossip on how companies are performing.
Check the net profit. Look at the EPS. Compare it to find the BVPS. Get that pinball machine.
Feel free to check out the girls in this blog. I mean, check out the information in this blog.