A lot give up learning the fundamental analysis as they find no ways to learn and conduct the in-depth research.
Let's start telling a story before getting back to talk about how to read an annual report.
"When a pretty girl who is being wooed by a lot of guys, she'd feel proud and happy but at the same time, she'd also feel headache as it's too many choices that she does not know how to choose (make the decision). Therefore, she's likely to go through the basic information and some background checks before making the decision. After getting everything confirmed, then she has to interact with the selected one to ensure whether the relationship can be lasting..."
To put the above into perspective, the same concept can apply prior to kicking the tyres. How so? Prior to choosing your partner (the company), the annual report is used to look for the basic information, its background and ideas, in order to dig deeper into it.
You may glance through the following sections under the annual report before kicking the tyres:
1) 5-year Financial Highlights
> To glance through whether its financial performance is trending up or down
2) Chairman's Statements (read few years as some of it would repeat the similar ones)
> To put focus on what promises the managers have given, what they've discussed in terms of the future growth prospects, how they execute their plans
3) Company's Business Overview (Operations review - voluntary reporting)
4) Segment reporting
> To look through its business/operating segment, geographical segment
5) Statements of Comprehensive Income (Income Statements)
> To look through its revenue, margins and operating expenses
> To look through its revenue, margins and operating expenses
6) Statements of Financial Position (Balance Sheets)
> To look through its hard cash, gearing, working capital
7) Statements of Cash Flow
> To look through its operating cash, investing cash and financing cash
8) Directors' remuneration package
> To look through whether there's a 'fat cat' and assess whether the management is tempted to pursue his/her own interest
9) Dividend policy
> Dividend payout is one of the key clues to assess the management's promise.
Example: Padini's Chairman's Statement states that
"As can be seen from the above table, all the trading subsidiaries except Vincci have improved upon their performances. A drop in Vincci sales at home plus the cessation of the operations of the V+ stores have caused revenues to contract by about RM17.6 million; coupled with a 2% decline in gross margins earned, its profit before taxation fell considerably. Though an analysis of the situation had pointed to several factors, the main problem here was that the general level of design and quality of the merchandise offered for sale had over the years remained unchanged and had not kept in step with the changing preferences of the market. While actions have been taken to address this deficiency, the scale of Vincci’s operations will mean that it may take some time before the decline can be reversed." (Source: Padini's FY2014 Annual Report, page 11)
What does it indicate? The managers try to bring up their mistakes and look into ways of revamping it. Is the manager candid?
So do you think reading the annual report is good start to know more about the company (your partner)? Let's look at how the investor and commodities guru, Jim Rogers talks about the annual report.
Jim Rogers: Read everything
The best advice I ever got was on an airplane. It was in my early days on Wall Street. I was flying to Chicago, and I sat next to an older guy. Anyway, I remember him as being an old guy, which means he may have been 40. He told me to read everything. If you get interested in a company and you read the annual report, he said, you will have done more than 98% of the people on Wall Street. And if you read the footnotes in the annual report you will have done more than 100% of the people on Wall Street. I realized right away that if I just literally read a company's annual report and the notes -- or better yet, two or three years of reports -- that I would know much more than others. Professional investors used to sort of be dazzled. Everyone seemed to think I was smart. I later realized that I had to do more than just that. I learned that I had to read the annual reports of those I am investing in and their competitors' annual reports, the trade journals, and everything that I could get my hands on. But I realized that most people don't bother even doing the basic homework. And if I did even more, I'd be so far ahead that I'd probably be able to find successful investments.
The best advice I ever got was on an airplane. It was in my early days on Wall Street. I was flying to Chicago, and I sat next to an older guy. Anyway, I remember him as being an old guy, which means he may have been 40. He told me to read everything. If you get interested in a company and you read the annual report, he said, you will have done more than 98% of the people on Wall Street. And if you read the footnotes in the annual report you will have done more than 100% of the people on Wall Street. I realized right away that if I just literally read a company's annual report and the notes -- or better yet, two or three years of reports -- that I would know much more than others. Professional investors used to sort of be dazzled. Everyone seemed to think I was smart. I later realized that I had to do more than just that. I learned that I had to read the annual reports of those I am investing in and their competitors' annual reports, the trade journals, and everything that I could get my hands on. But I realized that most people don't bother even doing the basic homework. And if I did even more, I'd be so far ahead that I'd probably be able to find successful investments.
