Annual Report and Reports
The content of this article
One of the most important ways to make an analysis of a company is to read and interpret the company’s annual report. This is where the last year’s financial results are gathered and this is where you read the administration report from the CEO (the CEO’s word). Here you will also find information for calculating the key figures that you use to do your stock analysis.
Further down there is also an educational video on how to interpret annual reports
Reading financial reports and accounts can be as dry as snot in the Sahara and it is therefore important to approach the annual reports a little cautiously. You can start reading through what the company’s CEO says first. What he thinks about the future prospects and the current situation for the company. If it is a good and healthy company, it is usually not just inflated dream scenarios but good and solid comments about what is going well and also what is going badly or if you expect strong demand for the future. So it can be a good start when you read the report.
Board of Directors´ report and the CEO´ s word
Here you will find information about important events during the year, how the company is managed and what strategies and plans there are for the future. This part is important so that you can quickly get an overview of how things are going for the company. Keep in mind, however, that this section sometimes contains some ”company phrases”. It can be good to think about reading between the lines. An important department here is usually to read the CEO’s word to see what he thinks about the situation for the company right now.
In the income statement you will find information about income, expenses and the result. Revenues and expenses are usually reported in a certain order in order to end with the tax and the result for the year on the last two lines.
Key figures where the income statement is used:
- P/E ratio
- PEG ratio
- P/S ratio
- Return on Equity (ROE)
- Ebitda and ebit
In the balance sheet, assets, liabilities and equity are reported. Here we find on the “one side the balance sheet” the assets and on the other side the equity and liabilities. Here one can easily misunderstand the meaning of equity and that this is actually a debt for the company. The equity is namely the shareholders’ and is seen as a liability for the company. Here, the sum of the assets must always be as large as the sum of the liabilities and equity.
Key figures where the balance sheet is used:
- Price-to-book-ratio (PB)
- Return on Equity (ROE)
- Debt/equity ratio
- Net asset value
Auditor´ s report
Here, the auditors give their views on how the company is managed by the CEO and the board, and they also make a report on the annual report and accounts. Here, the auditors often give the CEO and the board discharge, which the meeting then decides on.
Cash flow analysis (financing analysis) for larger companies
In the cash flow analysis, the company provides a picture of how the cash and cash equivalents have changed during the year. We can define cash flow as a company’s payments (sales, new issues, loans) and disbursements (amortization, purchases, interest, costs) for a specified period. Here you want to see that the company has a positive cash flow for several periods that can be used for the company to grow and at the same time be able to distribute money.
In the video, The finance storyteller explains how to interpret an annual report.