You would think that annual reports are the bread and butter of any investor’s decision making in the stock market. The reality, however, might surprise you. Studies have shown that only 20% of retail investors bother to read the annual reports sent to their mail each year. Many of them simply rely on brokers’ advise or pure “gut feel”. This kind of investing can be extremely dangerous and lead to poor decisions in the stock market.
Having said that, I too feel the inertia when it comes to reading annual reports. The reports are boring and monotonous to read and can sometimes span over 100 pages. That is why I thought it might be helpful to highlight just three things that we should focus on when reading annual reports.
The CEO’s statement
The CEO’s statement gives us a broad idea of where the company stands today and the outlook over the next few years. It is a good starting point to understand the economic situation the company is in and what new dealings the company has performed over the last year.
This is also a good place to get an idea of how candid the CEO is to his shareholders. A good summary should include all good aspects of the business, as well as any difficulties that it has faced over the year.
The financial statements
The financial statements are easily the most important part of the company’s annual report. It gives us an insight into the company’s revenue and earnings. It can also let shareholders know whether the company has the financial stability and liquidity to maintain operations and see off any short-term debt.
Such things are important to note about a company, which can be quickly known from looking at the three financial statements.
Management discussion and analysis
This part of the annual report outlines the management’s views on the current trends and developments in the industry. This information can be vital in assessing how the company can perform in the next few years. Some companies also give guidance on what they expect going forward and may sometimes give predictions on future financial growth.
It is also a good idea to compare past management analysis reports to see how accurate they have been in their guidance previously.
The Foolish bottom line
Each year, most investors simply toss the annual reports of the companies they have invested in into the bin.
However, the fact that you are reading this, tells me that you are not like most investors. If you wish to take control of your investments and reap better investment returns, reading the annual reports of companies is the most fundamental step. By focusing on just these three aspects of the report, we can save time and still get a good idea of how the company has progressed.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.