total of 19 out of 31 companies listed on the T&T Stock
Exchange have a December 31 year end.
As we move towards the end of April most of these companies
would have already presented their annual reports to their
shareholders. Those that have not yet done so must surely
be very close.
All public companies are required by law to provide to every
shareholder a copy of their annual report. Yet despite the
significant degree of time and cost involved in preparing
and disseminating these reports many investors only offer
a cursory glance at its contents before casting it aside.
Even so as a shareholder you should note that the annual report
is arguably the single most important document that you will
receive from a company and should form the basis for your
future investment decisions.
The indifference of some shareholders often comes from the
inability to properly understand the contents of the report.
This article provides an insight into the information contained
in the annual report especially as it relates to your future
Why an annual report?
An annual report includes information about a companys
performance during the previous year, as well as managements
view of the companys strategy for the future.
As a shareholder your objective should be to use this information
to hold management accountable for their stewardship of shareholder
resources over the past year as well as use managements
strategies to form your own prediction on how the company
will perform in the future.
If you are a potential investor then the annual report will
help determine whether a company might be an attractive investment.
To this end the annual report can contain useful information
regarding a companys corporate mission, business model
and quality of leadership. These factors though often overlooked
should form part of the investment decision making process.
One of the principal tenants of finance is that a company
exists primarily to add value to its shareholders. The annual
report provides the basic mechanism of accountability in this
relationship and therefore lies at the core of good corporate
Shareholders and potential investors alike who underestimate
the importance of financial disclosure within the context
of corporate governance should look no further than the spectacular
collapse of Enron, Global Crossing and World Com in the United
States and the debilitating impact that this had on its stakeholders.
With the benefit of hindsight we now know that the warning
signals surrounding the aforementioned collapses were out
there for all to see. However, from the investors perspective
and especially in our local environment there is a real aversion
on the part of the average investor to reviewing a companys
This often means that publicly available information is not
readily and accurately absorbed into a companys share
price resulting in investment decisions which to the seasoned
observer may seem irrational.
The financial statements which form part of the annual report
present a summary of the companys financial situation.
Consolidated results are usually presented meaning that the
financial results of all of the companys business segments
and subsidiaries have been added together into one report.
These financial statements carry information on total revenues
and expenses (the income statement), assets, liabilities and
shareholders equity (the balance sheet) and the flow
of cash in and out of the company (the cash flow Statement).
These along with the statement of changes in shareholders
equity form the core financial record of a companys
performance in the current year which is presented with a
comparison of similar transactions from the prior year.
The ability to compare transactions and activities from one
year to the next is the most basic form of financial statement
analysis and should be well within the grasp of all shareholders.
Company directors who are keen on proper disclosure and good
corporate governance would often provide an explanation for
significant year on year changes as depicted in the financial
Earnings is key
The investor community generally places the most emphasis
on the income statement.
Key items to look out for in the income statement include
the level of revenues directly resulting from core business
activities, income from investments and one off sources of
The other part of the income statement details expenses with
key items being costs associated with generating sales, general
operating costs, finance costs and taxes. There may also be
one off expense items.
It is important that an investor isolate one off income and
expenditure items when conducting their analysis since as
the name suggests these items will not recur in the future.
Apart from this obvious point, one off items can also distort
performance relative to another company thus making comparisons
between companies difficult.
For investors the most important benchmark comes at the end
of the income statement. The EPS or earnings per share takes
the profits attributable to the shareholders and divides it
by the number of shares in issue. This has the effect of attributing
part of the companys earnings to the number of shares
you own and also allows you to compare these earnings to your
earnings in other companies.
Cash is king
The difference between earnings and cash flow is often misunderstood.
The cash flow statement reflects the total amount of actual
cash that has moved in and out of a company.
On the other hand earnings depend on the manner in which transactions
are recorded and the timing of those transactions.
Earnings can potentially be manipulated while the cash flow
statement is exactly what it purports to be and cant
be easily manipulated to suit managements specific circumstances.
As a general rule, you should be concerned about an overall
negative cash flow position even if a company is recording
profits. Alarm bells should really be ringing when there is
a negative cash flow from operations as this means that the
company is not generating cash from its core business activity.
Summing it up
The balance sheet represents a snapshot of the company at
a specific point in time. In general it describes the companys
assets and liabilities.
Shareholders will be particularly interested in a companys
debt burden as the higher the level of debt as a percentage
of the companys equity the higher the risk of your investment.
Last but not least are the notes to the financial statements
which simply provide more details on specific line items.
Some of these additional disclosures are required by the relevant
accounting standards and some also arise from managements
willingness to disclose additional information as part of
their corporate governance system. Either way these notes
can provide useful insight into a companys performance.
You are advised to take the time to review the annual report
and let it inform your investment decisions.
If there are items that you do not quite understand please
be sure to contact your stockbroker. As a shareholder the
law empowers you so that you can safeguard your investment,
please do so as best as you can.
Ian Narine can be contacted at [email protected]
or at http://www.wiseequities.com