The majority of Australian companies work off a June financial year, so full year results are often posted in August. If you have a direct investment in shares now is the time to take a look at the company’s latest annual report. It will show how the company has fared over the last year and offers a better idea of where your investment could be heading than the opinion of taxi drivers or mates at the pub.
There’s no getting around the fact that company reports are dry reading. But you don’t have to be a business expert to get some valuable information from them.
One of the key sections to head for is the Director’s Report. This will explain in (reasonably) plain English whether the company made a profit or loss, and the reasons behind the result.
Bear in mind that young companies just getting a foothold in the market may take years to show a profit. Similarly, comparatively smaller companies may still be struggling in the aftermath of the global financial crisis. The Director’s commentary on what the company is doing to build or rebuild the business can give you a sense of whether you investment is likely to languish or rise in value over time.
Another useful piece of information is the company’s Cash Flow Statement. It may look like meaningless rows of figures but it’s worth having a close look as it will show how the company is funding its activities.
In an environment of potentially rising interest rates you need to watch out that the company isn’t dramatically increasing its debt levels. As with households, relying too heavily on debt can be financially disastrous in the long run.
The company may have had an equity raising during the year, which should also appear in the cash flow statement. This is a low cost way for a company to fund expansion activities though it comes with the potential to dilute the value of your own investment in it as more shares are issued.
These days annual reports are available for download from most company websites. This makes it easier and quicker for shareholders and potential investors to access these reports but don’t be blinded by the glossy images.
It’s amazing how clever photographs can be used to imply or suggest that the company is already involved in certain markets or activities, which may not be the case at all.
Finally, it’s worth pointing out that a company’s shares may fall in value even if its annual report declares a fat profit. This is often because the profit, while healthy, falls short of expectations. It’s something that can be confusing for ordinary investors, but the key is to regard your shares as a long term investment and overlook the weekly or even daily movements of the sharemarkets.
If you’re struggling to come to grips with an annual report, there is no shortage of freely available information to fill in the gaps. The consumer website of the Australian Securities and Investments Commission is helpful, along with the Stock Exchange website.
The more you read these reports the less formidable they’ll become, and as a first-hand source of detail about a company, its activities and its future prospects, they are essential reading for investors.