Annual reports are useful tools for investors

The annual reports published by companies listed on the Jamaica Stock Exchange can be quite glitzy in appearance and no doubt cost huge sums to produce.

They tell much about the companies and are excellent public relations tools, but they are much more than that.

Annual reports give very detailed historical information about a company and help the reader to see the financial performance of the company.

They address the performance of a specific financial year. They show how much money the companies make and how, how much they spend and how the funds are spent, how they generate and use cash, and show the financial strength of the company by the information they provide on the assets and liabilities of the company.

It is a statutory requirement for the listed companies to publish their financial performance within a prescribed time after the end of the financial year, and to also publish interim reports on their performance each quarter.

As the financial statements for the full financial year have to be audited, the annual reports take a longer time to be published than the interim reports, which are unaudited and which provide less information.

Earlier, I described annual reports as public relations tools because they are used to show what they do. They often show the company at work at different levels in the community in living colour, showing them as good corporate citizens. They tend also to show executives and different levels of staff as real people who care and are real and sometimes show aspects of the operations of the company.

This side of companies no doubt connects with their shareholders, who, nonetheless, are primarily concerned with how the companies that they are owners of are able to generate wealth for them by making profits consistently, thus causing the price of their shares to increase and often paying dividends.

The annual report is a useful tool for the company to build intimacy with its shareholders through the various reports it contains.

The auditors’ report is prepared by a firm of qualified independent auditors and states whether the financial statements represent a ‘‘true and fair view” of the financial position of the company. An unqualified auditor’s opinion is essential as a qualified opinion could mean that the auditors are not satisfied that the company keeps proper accounting records, that there is disagreement over the extent of disclosure of information in the accounts, and there is uncertainty, for example, over the likely outcome of major litigation.

The balance sheet shows the financial strength of a company at a specific date, usually the end of the financial year. It shows the long-term and short-term assets of the company on one side and the short-term and long-term liabilities of the company on the other.

The assets are what the company owns and what is owed to it. The liabilities are what the company owes. It is important for the assets to be more than the liabilities, and by a good margin. It is important as well for the short-term assets to be higher than the short-term liabilities, as this measures how liquid it is, that is, how able it is to meet its short-term obligations.

Overall, the assets should be more than the liabilities, as this is an indication of the solvency of the company, which is its ability to meet its long-term debts and financial obligations.

The difference between the assets and liabilities is the shareholder’s equity, representing the value of the owners’, or shareholders’, interest in the business. The assets of the company are thus funded by shareholders’ funds and borrowed funds, and it is important that the level of debt is reasonable in relation to the equity.

The profit and loss statement, also called the income statement or earnings statement, addresses what many investors have a keen interest in – the profits of the company. It shows how much income the company earns and from what sources, the expenses incurred to generate the income and the difference – profit, if income exceeds expenses, or a loss, if expenses exceed income.

The retained earnings statement shows the profits that the company retains in the business after distributing some of its profits to shareholders in the form of dividends. To the extent that the company makes a profit over the years and does not distribute all of it as dividends, the retained earnings, or accumulated profits, increase.

The notes and supplementary schedules are very important to a good understanding of the financial statements and the operations of the company. They include a description of the business and what it does, explain the items in the financial statements and disclose risks and uncertainties affecting the business.

Financial statements are not perfect, as there is the risk of human error and they may fail to disclose matters which are of importance in making investment decisions.

Investors need not be intimidated – and some financial statements do look complicated. As part owners, they need to take time, little by little, to understand, even at the most basic level, how the companies are doing.

- Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. finviser.jm@gmail.com