A company's annual report is one of many sources of information that investors can use to judge the performance of the company. With Australian corporate earnings season now over, we explore four things you should look for in an annual report.
1. Compare this year’s annual report with last year’s annual report.
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. Consider whether the company has achieved the goals it set out for itself, and if this is a reason to be concerned about the company’s future.
2. Cash flow trends.
There can be a significant difference between what a company says it earned, using accounting standards, and the cash flow it generates. Cash is money in hand, not the result of accounting measurements and judgment calls, as is the case with earnings and net income. This line item is particularly important when making investing decisions. When a company's net income is much higher than cash flow, investors want to be aware and find out why.
Reflecting on the most recent reporting season, Michael Price, Portfolio Manager, AMP Capital Equity Income Fund said: “One of the key surprises was significantly stronger cash profit growth and thus high cash conversion rates, which were utilised to drive significantly stronger than expected dividend growth.”
3. Earnings and revenue growth.
If you invest in a company, you want to know how much the company earns and whether it's boosting its sales. This can tell you whether a company is on a growth trajectory or in decline, key factors that determine how much the company is worth. A company's earnings and revenue can be compared with its stock price to tell you if a stock is expensive or reasonably-priced.
According to Phillip Hudak, Portfolio Manager/Analyst, Small Cap Equities at AMP Capital, Australia’s August reporting season saw a widening divergence in earnings growth rates being delivered across the market: “Many domestically-focused companies continue to find operating conditions difficult given Australia’s economic recovery remains sluggish. However, a number of offshore exposed companies outperformed due to the more advanced recovery of other developed world economies relative to Australia.”
4. Debt load.
It's critical for investors to understand how much debt a company has and how that debt compares with its ability to pay. This requires examining a company's balance sheet and income statement. Debt isn't detrimental for a company, so long as it can generate ample cash flow to service the debt payments.
There is so much information on financial statements because these documents are the most critical pieces of information investors will get from individual companies. Reading these documents closely is one of the best ways for investors to evaluate the performance of the company and gauge new developments that may affect its performance in the next few years.
Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.