AGM season – getting a heads-up by understanding Annual Reports | Securities Investors Association (Singapore)

Date: March 27, 2015

April is the month for AGMs in Singapore, with 60% of all AGMs occurring in a single month. In a recent report on Shareholder Meetings by Prof Mak Yeen Teen, it highlighted that in 2014, 76% of all April meetings were held in the last five business days of April. These five days account for 37% of all meetings held in 2014. However, the clustering of AGMs within a particular month, while severe in Singapore, is even more pronounced in Italy, Japan, South Korea and Thailand and just as pronounced in Australia.

While the issues and reasons for AGMs clustering will be discussed in a forum with Prof Mak later in May; it is important for investors to read and understand the Annual Report. This week, we reprise the interview with James Leong, Chartered Accountant, Adjunct Professor, National University of Singapore and Executive Committee Member, SIAS.

Why Read Annual Reports?

A company’s annual report is the single most important way for it to convey itself to potential investors. As such, it should come as no surprise that an annual report serves to present the company in best light possible without violating any MAS or SGX regulations. Unfortunately, many investors read annual reports but fail to read them effectively. In other words, while annual reports are clearly prepared without any intent to deceive or reflect dishonesty about the business, investors should always read them with a sense of skepticism. In other words, how can investors learn to interpret the information within the annual report to make more informed investment decisions?

Editor:	Many investors shy away from going through the annual report when they receive it as it can be voluminous. Can you share with us the typical sections of an annual report and which part should they begin with.

*James:*	Broadly speaking, you can think of the annual report being divided into three main parts. The first part deals with the business aspects. This includes a review of the business operations, messages from the chairman and CEO. This is essential reading to understand what the business does and how did it fare in the past year. Good annual reports would show you at least five-year trend data and evenly quarterly data to give you a sense of progress of the business over the years and where it might be heading. They would talk to you about the prospects, risks, challenges and how the company intend to deal with them. The amount of information shared here by management will shed light on how transparent they are and provide the context for you to read the rest of the information in the annual report. The second key part would be the auditor report and corporate governance disclosures. The third critical part, which is what most people associate an annual report with, would be the financial statements with their accompanying notes to the accounts.

Editor:	In the analysis of the financial statements, what are some of the key items that investors should be looking out for. Why would the items be important in for analysis?

*James:*	In the balance sheet, take a look at the overall level of assets and compare to the previous year. This would give you an idea if the company is growing its business or just maintaining status quo. Then take a look at how it is funding this growth. Is it taking on more debt or equity to generate the growth? This would have an impact on risk. In the income statement, take a look at the profit margins to give you an idea if the company is maintaining its competitive edge (stable or growing margins), or is it experiencing pressure from pricing, escalating costs and expenses. Be mindful of one-off revenue or expense items that might distort your current year analysis. In the cash flow statement, determine if their operations are generating healthy cash flow or are they experiencing liquidity issues. Look at their free cash flow generation ability (cash flow from operating activities less capital expenditure) and trend too.

Editor:	Understanding risk of a company is vital. How can investors get a better understanding of the risk of investing in a company from the annual report?

*James:*	Review their leverage ratios. Typically a good annual report will show you this information in their five-year financial highlights. Use this to evaluate the trend and see if the company is getting too aggressive by funding its growth and operations with lots of debt.

Editor:	There is growing importance to the climate and environmental issues as well as non-financial information in evaluating a company. How can investors find this in an annual report? Are such disclosures useful? How does this translate to financial gain?

*James:*	It is part of the qualitative non-financial data that is being disclosed by companies. This shows the company’s role in contributing to sustainable growth. It speaks about the company as a good corporate citizen. By using scarce resources judiciously and leaving a smaller carbon footprint in its commercial activities, there would be a direct bottom line effect for the company through cost savings and efficiency. Socially responsible investing is catching on as certain funds use that as selection criteria to invest only in companies or industries that are environmentally responsible.

Editor:	There is discussion now for the adoption of Integrated Reporting. How would this change the way companies report and how useful would this be for retail investors?

*James:*	Going forward, the focus is to provide a short and long term view about how a company creates value in a sustainable way using all its available resources and interacting within a big ecosystem, rather than just short term emphasis on financials. Its emphasis on articulation of strategy, future orientation and understanding the external environment will provide greater transparency to retail investors about how a company goes about its business as it seek to create value.

James Leong is the creator and trainer of the SIAS Analysing Company Financials for Smart Investing workshop. He is also CEO of Visions.One Consulting Pte Ltd and has more than 20 years of international experience in audit, accounting and financial management. Recently, Mr. Leong has been featured as one of 10 influential professional speakers in Singapore by Singapore Business Review. His passion in teaching has seen him taught at various educational institutions including National University of Singapore, Victoria University of Technology and Institute of Chartered Accountants in Australia. NewsRadio 93.8, Capital Radio 95.8 (Mandarin) and SIAS (Securities Investor Association of Singapore) have regularly interviewed him on demystifying financial concepts and analysis of public listed companies’ annual reports. An executive committee member of SIAS, James is also a member of the judging panel for the Singapore Corporate Awards 2014, Best Annual Report category.

The next Analysing Company Financials for Smart Investing workshop will be on 11 April 2015, Saturday, 2pm – 5pm. Click here to register.