Personal Finance: How to read between the lines of annual reports
Saturday 21 February 1998
One joke doing the rounds of the accountancy profession in the early 1970s was that a company had explored cutting postage costs by sending the shareholders' dividend cheques out with the annual report and accounts. Their research revealed that most shareholders threw the report and accounts away unread and the cheques would be thrown away with them, and the project was abandoned.
Since then companies have made great efforts to improve the quality and readability of their messages to shareholders, and with good reason. "Reports and accounts are vital in assessing the performance and financial position of a company in which you might have current or future interest," says Gill Nott, chief executive of ProShare.
Companies are obliged by law to report regularly to shareholders. It is a means by which those with a financial interest in the enterprise can judge how well or badly the business is doing. The main report and accounts are published annually following the end of the company's financial year.
They are considered an important communication as it is the main way that a company has of explaining its business to the outside world, so it is not surprising that most companies nowadays take considerable time and effort in producing the document.
Generally, they are glossy publications which contain photographs and colourful diagrams detailing the business's progress. Naturally they also contain reams of figures. However, they typically begin with narrative statements which provide a commentary on the business and financial performance of the company.
The opening section is usually the chairman's statement, which gives an overall view of what has happened over the past year, as well as some comments on the future prospects of the company.
The next narrative statement is normally the chief executive's report. This provides a detailed commentary of the performance of each part of the enterprise as well as information affecting the company as a whole. In some reports this section is called the "operating and financial review".
Normally, the directors' report follows. This contains data which has to be disclosed by law. It includes details of any charitable or political donations the company may have made as well as giving the names of the directors and their personal shareholdings.
Of course, the most important element of the report and accounts is the financial information. If you find pages of figures daunting, follow Gill Nott's advice: "At least take time to read the chairman's and chief executive's statements, which will give you a feel for future prospects. Is it optimistic, or is there a note of caution there?"
Although the financial information may look complicated, it is relatively easy to become familiar with the columns of figures. Ease yourself in by taking a look at the financial summary. This gives the financial highlights for at least the past two and sometimes up to five years. It is therefore possible - at a glance - to see the trend for profits as well as earnings, dividends and net asset value per share.
The two key financial statements are the balance sheet and the profit and loss account. The balance sheet is a snapshot of the company's situation at the end of its trading year. It shows what the organisation owns - its assets - and what it owes - its liabilities.
Most companies traded on the stock market control a number of subsidiary companies. They therefore prepare a consolidated balance sheet showing the assets and liabilities of all the businesses combined, as well as a balance sheet for the parent company.
The profit and loss account shows how much profit the company has made. It shows the turnover, which is the total sum of goods or services sold during the trading year, and the company's expenses. If income exceeds costs the company has made an operating profit, but interest earned and paid then has to be taken into account to arrive at profit (or loss) before tax. The company's tax dues, the dividends paid to shareholders and the profits retained by the business will also be shown.
Other information to look at is the cash flow statement. This shows how much cash the company has generated from the business and other sources, such selling a large asset. It also shows how much cash has been spent over the year.
Here are some points to look out for:
n Cash flow: It is vital that there is a strong cash flow as it demonstrates that the earnings are real and it helps fund the company's expansion.
n Turnover: This is another key indicator. If turnover is up profits and earnings per share should be too.
n Pre-tax profits: If a business is doing well profits and turnover should show a rising trend.
n Dividends: Many investors prefer companies which pay a steadily rising dividend. Comparing earnings per share to dividends per share over a period will reveal the company's dividend policy.
It is essential to read the notes to the accounts as these often have important information tucked away. Although report and accounts are important, you must always remember that their contents are historic. You must keep up to date through newspapers and magazines with companies' news.
`Introduction to Annual Reports & Accounts' is a simple guide with a step-by-step approach to interpreting the information. It is published by ProShare at pounds 4.95 including p&p. Orders to ProShare (UK) Ltd, Library Chambers, 13-14 Basinghall Street, London EC2V 5BQ.
Independent Partners: See how much you could save by switching credit cards. Compare now
elephant appealThe first 23 lots in our charity auction have now gone. But there are 22 more still up for grabs
musicPolice chief rejects rappers' claims that his work is as dangerous as law enforcement or military service
comedy'Fresh Meat' star sees off stiff competition from Alan Carr, David Mitchell, Graham Norton, Lee Mack and Sarah Millican to win top prize
healthJames Bond's alcohol consumption puts him at 'high risk' of cirrhosis, tremors... and impotence
Beatles rush out 'bootleg' album to defy EU copyright law
Harvey Weinstein reveals his secret weapon on-set
Now that an oil trader's drinking has got him sacked, will we all have to make do with an afternoon latte?
- 1 French café starts charging extra to rude customers
- 2 Sun will 'flip upside down' within weeks, says Nasa
- 3 Australia incest case: Deformed children found in remote farming community after generations of inbreeding
- 4 Physicists discover 'clearest evidence yet' that the Universe is a hologram
- 5 Fox News presenter tells viewers it is a 'fact' that both Jesus and Santa Claus are white
- < Previous
- Next >
iJobs Money & Business
£200 - £240 per day: Harrington Starr: Client Data Management - City - Brokera...
£44999 - £60001 per annum + Benefits: Pro-Recruitment Group: A Top Tier firm i...
£30000 - £45000 per annum + Bonus + Benefits: Harrington Starr: Regulatory Man...
£50000 - £75000 per annum + benefits + bonus: Harrington Starr: Pre-Sales / Cl...
Day In a Page
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.
A six-bedroom detached period property with secluded gardens, ample parking and a double garage in Rye, £675,000.
A large split-level property with three double-bedrooms and roof terrace, close to Crouch End Broadway, £625,000.