This article is written in collaboration with SIAS. All views expressed are the independent opinion of DollarsAndSense.sg
When we want to go on a holiday, we do extensive research to compare air fares and hotel prices; read reviews of the destination, food, accommodation and attractions; research on the best and cheapest ways to enjoy the holiday and more.
Similarly, we would be willing to put in the required research for many things in our lives, be it large or small, such as trying a new restaurant, upgrading to a new handphone, buying a car and many other things.
It also makes sense that since our investments have much longer-term implications for our retirement, that we should put in even more effort in our research. Simply put, we shouldn’t leave our investments to chance – listening to hot stock tips, getting caught in the hype of popular companies or trying to guess stock chart patterns if we don’t know better.
One important resource we can use to research on a company we have invested in (or are considering to invest in) is through its annual report.
What Purpose Does A Company’s Annual Report Serve?
Firstly, we should note that listed companies in Singapore are required to issue annual reports to shareholders and the Singapore Exchange (SGX) at least 14 days before the date of its Annual General Meeting (AGM). Listed companies also have to hold its AGM at a date not exceeding four months of its financial year end.
Apart from complying with regulatory requirements, a company’s annual report also serves to promote the company, showcase its achievements, provide financial and business updates and offer other important information about the company.
While the information in a company’s annual report pertains to its latest financial year, it typically includes comparisons against past years to help investors get a better grasp of its longer-term financial and business progress.
Where Can I Find A Company’s Annual Report?
There are three main ways we can find a company’s annual report:
# i As listed companies in Singapore have to submit their annual reports SGX, we can retrieve it on the SGX website.
# ii Listed companies tend to maintain an investor relations website to better engage with their shareholders and other potential investors as well. We can usually download their latest, and past years, annual reports on their websites.
# iii As mentioned above, companies are required to issue its annual reports to its shareholders at least 14 days prior to this AGM. This is usually in the form of a hardcopy sent to our address. If we are not shareholders, we can also submit a request to receive the annual report on the company’s investor relations website. While they are not required to send non-shareholders an annual report, some companies could make exceptions.
What Are The Main Sections I Should Look At In An Annual Report?
# 1 Chairman Statement
The Chairman Statement is one of the first sections to zoom in on within an annual report. Since it is coming from the main executive running the business, the tone of it gives us a good gauge on how the company has performed with respect to expectations.
The SGX rulebook states that an annual report “must provide a balanced and readable summary of the issuer’s performance and prospects, and should represent the collective view of the board.”
While it is in the company’s best interest for the Chairman Statement to be fundamentally positive, it also has to be balanced and informative. In it, we also get insights into the chairman’s thoughts, including his proudest achievements in the year, the exciting developments he is focusing on in the short-term and where he thinks the company will be in the longer-term.
Often, the Chairman Statement also offers analysis on why the company performed well or poorly, as well as why it has taken certain business or investment decisions in the year.
# 2 Board Of Directors & Management Team
In this segment, we can see the main people in charge at the company and their experience.
The Board of Directors will usually include the company’s key executives as well as the Independent Directors. At the same time, the Independent Directors at the company are there to provide an objective check on the management, and ensure that corporate decisions are made in the best interest of the company as a whole and not any particular shareholders.
While retail investors will not be able to impact who the Board of Directors and management team are, we need to trust that they are able to achieve their objectives and grow the company in a sustainable manner. Knowing who they are, how long they have been with the company, their shareholdings in the company and which other companies they may be working with may have an impact on whether we think we should invest in the company.
# 3 Financial Statements
Within its financial statements, the income statement and balance sheet are commonly read by many shareholders.
The income statement gives us a breakdown of the company’s revenue, expenses and profits for the year. This is usually compared to the year before, but we can look at other sections of the annual report or past annual reports to look for positive/negative trends.
The balance sheet gives us a snapshot of the company’s assets and liabilities. A company’s assets include cash, property, equipment, inventory and receivables, while its debt mainly includes debt and payables. Its assets are important, and we can learn more about its operations. Its liabilities give us a good gauge of its debt levels. Companies with too much debt, compared to assets can be riskier.
# 4 Auditor’s Report
In this section, you will find out who the company’s auditor is. Having the accounting company sign-off on the company’s financial statement means the annual report is a valuable and trustworthy information resource on the company.
The main thing we should look out for this the following paragraph:
“In our opinion, the accompanying consolidated financial statements of the Group and the statement of financial position of the Company are properly drawn up in accordance with the provisions of the Companies Act, Chapter 50 (the “Act”) and Financial Reporting Standards in Singapore (“FRSs”) so as to give a true and fair view of the consolidated financial position of the Group and the financial position of the Company as at [Date] and of the consolidated financial performance, consolidated changes in equity and consolidated cash flows of the Group for the financial year ended on that date.”
# 5 Corporate Governance
The SGX Rulebook also states that companies must “report its corporate governance practices with specific reference to the principles and the provisions of the Code.”
The Code of Corporate Governance includes 13 principles that companies need to disclose information on a comply-or-explain basis. These typically refer to having the appropriate people, processes and structures in place to manage the business and enhance long-term shareholder value.
These principles include:
What Do You Do After Reading An Annual Report?
After reading and digesting information in the annual report, we are better equipped to make an investment decision. Some of us would like to do more research, and there is a wealth of other resources that we can use to increase our knowledge about a company.
If we choose to invest, we should realise that we need to continue monitoring our investments even after that. Of course, this is because good companies can still get into financial or business difficulties, and we need to review it again to assess whether we still want to be invested.
After investing in a company, we are entitled to certain Shareholders’ Rights, which includes the right to speak, attend and vote at a company’s general meeting. A company’s Annual General Meeting offers us an opportunity to further build on any information we have already learned about the company.
During the AGM, we will hear from the key executives in the company and will be able to ask them questions about the business. If we aren’t sure what we should be asking, we can hear what other shareholders’ have to ask or lean on the Securities Investors Association, Singapore (SIAS), that prepares questions beforehand for companies to answer at their AGMs. This lets us understand the types of information they are zooming in on and enable us to ask our own questions in the future.
Since 2016, SIAS has asked more than 788 sets of questions to companies, with requests that they are answered during their general meetings and posted on SGXNet for the benefit of all existing and potential investors.