|
By Lorna Tan, Senior Correspondent
They are supposed to throw light on how a company has fared over the previous 12 months, but annual reports often do more to confuse than clarify, leaving frustrated investors in the dark. However, help is at hand.
The Singapore Exchange (SGX) has produced two guides to help investors make sense of the numbers and jargon in reports.
After all, the report is the centrepiece of communication between the listed firm and its shareholders, and a great deal of time and effort has been spent writing it.
Reports also contain everything an investor needs to allow him to pose pertinent questions at annual general meetings (AGMs).
Ms Yeo Lian Sim, SGX's senior executive vice-president and head of risk management and regulation, told Invest: 'Shareholders should devote more time to go through the annual reports critically and question the board and management at the subsequent AGMs.'
Financial consultant Jason Wee from consultancy firm Universe Within urged investors: 'Go there, be heard and make your vote count. For most of us, AGMs are our only chance to directly query top management.'
The SGX publications - An Investor's Guide To Reading Annual Reports and An Investor's Guide To Preparing For Annual General Meetings - can help get you fighting fit before the encounter.
There will also be webclips available soon on the SGX website to explain portions of the guides for those who prefer audio assistance.
Here are highlights from the two guides.
READING ANNUAL REPORTS
Why should I bother to read an annual report?
It is usually the only published document providing investors with an annual snapshot of the firm's financial health.
Ignoring salient points lodged in the fine print can prove disastrous. Once you have understood the key issues, it is prudent to review the online interim and full-year results that are released even before the annual reports. These can be found in the Company Announcements section on the SGX website.
What are the main sections of the annual report?
Section 1: Introductory pages
These include the chairman's statement, business review and outlook, and management discussions.
They seek to present the company's core business and give an idea of the areas that the management is focusing on and the risks it is addressing.
Warning signs
- If, after reviewing the company profile and introductory pages of the annual report, you remain unclear on how the firm makes money, you are best advised to look at another firm.
- Alarm bells should sound if stated plans are unclear, or do not take the firm forward, or do not make sense to you in the light of what you know.
- Beware of any management which fails to mitigate risks. If information on risk mitigation is insufficient, query.
- If past plans and/or risks are no longer discussed, query.
Section 2: Corporate governance disclosure
The Code of Corporate Governance 2005 (CG2005) was designed to raise the standards on accountability to shareholders.
Warning sign:
- Delve into the background of independent directors, who should make up at least one-third of the board's composition, to understand them better.
Section 3: Financial statements
Review the financial statements to assess various aspects of the business performance and the potential risks the firm may face.
Warning signs:
- Look out for declining margins (derived from ratio of profit to total sales) and dependency on non-recurring gains. The latter refer to gains that are one-off in nature.
- If the cash cycle is rising (that is, it takes a longer time to convert the profit from sales into cash), then inventory and receivables might be piling up too fast.
- Check if the firm's borrowings are for the right assets. Gearing (derived from total debt divided by total equity) levels of 30 to 50 per cent are tolerable but query if they are higher.
- Check if rising earnings are accompanied by declining return on equities (derived from net profit divided by equity).
Section 4: Other issues
These include details on the different business segments, cash dividends and the auditor's report.
Warning signs:
Weakness in some segments might be offset by gains in others. This breakdown can sometimes help identify where the growth is coming from.
Check if the auditors have given the firm a clean bill of health. For example, in March, PricewaterhouseCoopers, the auditor of China-based producer of soya bean food and beverages Celestial NutriFoods, raised concerns that the firm may be unable to 'continue in operational existence for the foreseeable future' if all bond holders redeem early and new finance is not forthcoming.
Can all annual reports be read in the same manner?
The above guidelines are more appropriate to firms in the manufacturing, commerce and service sectors.
For real estate firms, a different analysis is required. The historical Income Statement is less crucial as its income comes from projects which are already developed. Instead, focus on the balance sheet and find out how the assets are positioned. In the case of real estate investment trusts, check if the dividend yield is sustainable and if the funding or borrowing is secure within the next three years.
'Gearing is actually good if the property cycle is on the rise, while net cash is clearly preferred if the cycle is on the way down,' said Mr Wee.
If I have only 10 minutes, what should I look at in the annual report?
- Glance through the chairman or chief executive officer's statement. Read the first two and last two paragraphs in detail. This should give you a gist of how the business is going. Do the same for the management discussions and operational analysis.
- Check if independent auditors gave the firm a clean bill of health. The primary objective of an audit is to provide a true and fair view of the financial statements. Nevertheless, a clean audit report should not be taken as a guarantee that the company is free of fraud.
- Look at the financial statements and check if:
- 1. Net profits are positive, rising or falling;
- 2. Sales are rising or falling;
- 3. Operating cash flow after working capital adjustments is positive or negative;
- 4. Net debt is rising or falling;
- 5. Dividends (as a percentage of net profits) are rising or falling.
- Look for the segmental breakdown in the notes to the financial accounts and review the sales and earnings for each segment to see if they are improving or declining.
- For all areas which suggest deterioration, look for an explanation in the discussions or seek clarification from the firm.
This article was first published in The Straits Times.
| 
