Today is Your Lucky day
If you have been visiting my blog, and that you are happy with my sharing so far, I am going to reward you with few hundred bucks. As a value investor, you need to analysis a company performance both on quantitative and qualitative factors. On quantitative factor, you must be able to study and analyse a company’s financial report. This is one of the important and basic skills that a value investor must acquire. I mean if you don’t even know about a company’s performance and health, what value investment are you talking?
If you attend a training or workshop on “how to read financial report”, it’s going to cost you a few hundred bucks. You don’t believe? Our SGX conducts such workshop too. Go to their website and see how much they charge you.
But today, I’ll teach you for free. Like I said earlier, “I am going to reward you with few hundred bucks”. This will be very useful especially for non-accounting students or a beginner. Otherwise, you will fall asleep within 1 minute after you start reading an annual report. I’ll break the whole session into various parts with detail explanation in each for your easy reading.
1) What is a financial report
The first question is what is a financial report. A financial report, whether it is a quarterly, interim or annual report contains, among others, a profit and loss statement (also known as income statement), balance sheet, statement of changes in equity, cashflow statement etc. A quarterly or interim report would be much simpler in its format than an annual report. Under the SGX’s listing manual, a listed company must observes the following listing requirements:
- Generally, to release audited annual report not more than 60 days after its financial period.
- Generally, if market capitalization exceeds $75 million, must issue three quarterly reports. Otherwise, quarterly reports are not required.
I used the word “generally” above because there are other clauses but I am not suppose to make it more complex otherwise you might as well read the full listing manual. It is important to highlight here that a listed company’s annual report must be AUDITED by an EXTERNAL auditor. But the quarterly reports and interim report need not to be audited. Interim report refers to first half-year report. And certainly, an audited report is more reliable. While the external auditors add pain to a listed company, they are our friends and “policemen”.
2) Where to get a financial report
Please take note that when a listed company announces its year-end result on the SGX, it is usually NOT audited. How to know? Well, for an audited report, it certainly cannot be just five or ten pages like those on the SGX’s announcement. But the announcement of unaudited report is equally important because it give us first hand guide before the auditors complete their job. Usually the final audited figures will be slightly different but not too far off. It cannot be that the company released a good profit at the end of the year but turned out to be a loss after the auditors’ checks and adjustments. If it happens, then both the company’s management and shareholders’ are in a “shit”.
If you are a shareholder of a company, you are entitled a hardcopy of (colourful) audited annual report. Alternatively, you may also download the report from the company’s website. You may also, as potential investor, email to the company’s investment relation officer for a free copy. I did once on Tan Chong International and they send a copy to me from Hong Kong. If you invest through CPF, you must give instruction to your agent bank.
Just to share my experience. DBS is my investment bank and preivously I had an argument with them for not sending a copy of annual report to me. They push the responsibility to the listed company itself and make me call here, there and everywhere including the CDP. I was pissed off. Finally, I confirmed that it should be the investment bank’s responsibility and wrote to their management a last warning letter - if they cannot resolve it by certain dateline, I’ll change to another bank. They investigated and resolved it. They explained that the root cause was because I did not check a particular box in my application for CPF Investment Account.
3) In the annual financial report
Firstly, in the audited financial report, you can find the following items:
- Chairman and/or CEO’s Statement
- Board of Directors
- Financial Review/Highlights
- Corporate Governance Report
- Information and Report of Directors and Management (including share options scheme)
- Auditors’ Report
- Consolidated Income Statement
- Balance Sheet
- Consolidated Statement of Changes in Equity
- Notes to Financial Statements
- Statistics of Shareholdings
- Notice of Annual General Meeting
- Proxy Form
Take note that for a very big company or company listed overseas, the content may be different. I’ll go through to explain each of them by orders of importance (according to me). Take note again that subsequent points should be read in conjunction with an audited financial report instead of a quarterly or full year result announcement made to the SGX.
a) Auditors’ report
The very first report that you should read is the auditors’ report. Like I said, the external auditors are our friends and policemen. They are independent and should be the first person to rely on. Why are they independent? These auditors are not paid by the company they audit but their very own bosses (the audit firm). The listed company will pay the audit firm for their service. But could there be some “connections” between the audit firm partners and their client? Well, the partners are fully and “personally” liable for any mistakes and wrongdoings. They signed on the report; they signed their reputation and business on the report. The partners can be sued for wrongdoings or even negligence. That’s why none of my friends want to set up an accounting/audit firm.
Now, if the auditor “qualified” the report, you can dump the annual report and move on to another potential company. Qualifying a report here is an accounting jargon. We don’t mean that the auditors give the company a certificate. By NOT qualifying a report means that everything is in order and nothing unusual was discovered from auditors’ random checks. In an unqualified report, the auditors will first explain their work and then form their opinion as such:
“In our opinion, the consolidated financial statements and balance sheet are properly drawn up according to the Act and Accounting Standards and give a true and fair view of the state of affairs…..”
“The accounting and other records required by the Act to be kept by the company…… have been properly kept……”
The first Para is telling you that the financial statements had been sufficiently prepared according to the Act and accounting standards. The second Para is telling you that the company has prepare and keep its accounting books properly. In sum, everything is OK! When the auditor qualified the report, they will say some other things like “we like to draw attention to….” or “we could not agree with a accounting practice by the company” etc. The worst opinion is when auditor “doubt that the company is still a going concern”. This means that company’s business may not go on for the next one year. In this case, you don’t have to continue reading the annual report anymore. In times of crisis or recession, this kind of opinion is more common than current bullish market.
To be continue……
If you have been visiting my blog, and that you are happy with my sharing so far, I am going to reward you with few hundred bucks. As a value investor, you need to analysis a company performance both on quantitative and qualitative factors. On quantitative factor, you must be able to study and analyse a company’s financial report. This is one of the important and basic skills that a value investor must acquire. I mean if you don’t even know about a company’s performance and health, what value investment are you talking?
If you attend a training or workshop on “how to read financial report”, it’s going to cost you a few hundred bucks. You don’t believe? Our SGX conducts such workshop too. Go to their website and see how much they charge you.
But today, I’ll teach you for free. Like I said earlier, “I am going to reward you with few hundred bucks”. This will be very useful especially for non-accounting students or a beginner. Otherwise, you will fall asleep within 1 minute after you start reading an annual report. I’ll break the whole session into various parts with detail explanation in each for your easy reading.
1) What is a financial report
The first question is what is a financial report. A financial report, whether it is a quarterly, interim or annual report contains, among others, a profit and loss statement (also known as income statement), balance sheet, statement of changes in equity, cashflow statement etc. A quarterly or interim report would be much simpler in its format than an annual report. Under the SGX’s listing manual, a listed company must observes the following listing requirements:
- Generally, to release audited annual report not more than 60 days after its financial period.
- Generally, if market capitalization exceeds $75 million, must issue three quarterly reports. Otherwise, quarterly reports are not required.
I used the word “generally” above because there are other clauses but I am not suppose to make it more complex otherwise you might as well read the full listing manual. It is important to highlight here that a listed company’s annual report must be AUDITED by an EXTERNAL auditor. But the quarterly reports and interim report need not to be audited. Interim report refers to first half-year report. And certainly, an audited report is more reliable. While the external auditors add pain to a listed company, they are our friends and “policemen”.
2) Where to get a financial report
Please take note that when a listed company announces its year-end result on the SGX, it is usually NOT audited. How to know? Well, for an audited report, it certainly cannot be just five or ten pages like those on the SGX’s announcement. But the announcement of unaudited report is equally important because it give us first hand guide before the auditors complete their job. Usually the final audited figures will be slightly different but not too far off. It cannot be that the company released a good profit at the end of the year but turned out to be a loss after the auditors’ checks and adjustments. If it happens, then both the company’s management and shareholders’ are in a “shit”.
If you are a shareholder of a company, you are entitled a hardcopy of (colourful) audited annual report. Alternatively, you may also download the report from the company’s website. You may also, as potential investor, email to the company’s investment relation officer for a free copy. I did once on Tan Chong International and they send a copy to me from Hong Kong. If you invest through CPF, you must give instruction to your agent bank.
Just to share my experience. DBS is my investment bank and preivously I had an argument with them for not sending a copy of annual report to me. They push the responsibility to the listed company itself and make me call here, there and everywhere including the CDP. I was pissed off. Finally, I confirmed that it should be the investment bank’s responsibility and wrote to their management a last warning letter - if they cannot resolve it by certain dateline, I’ll change to another bank. They investigated and resolved it. They explained that the root cause was because I did not check a particular box in my application for CPF Investment Account.
3) In the annual financial report
Firstly, in the audited financial report, you can find the following items:
- Chairman and/or CEO’s Statement
- Board of Directors
- Financial Review/Highlights
- Corporate Governance Report
- Information and Report of Directors and Management (including share options scheme)
- Auditors’ Report
- Consolidated Income Statement
- Balance Sheet
- Consolidated Statement of Changes in Equity
- Notes to Financial Statements
- Statistics of Shareholdings
- Notice of Annual General Meeting
- Proxy Form
Take note that for a very big company or company listed overseas, the content may be different. I’ll go through to explain each of them by orders of importance (according to me). Take note again that subsequent points should be read in conjunction with an audited financial report instead of a quarterly or full year result announcement made to the SGX.
a) Auditors’ report
The very first report that you should read is the auditors’ report. Like I said, the external auditors are our friends and policemen. They are independent and should be the first person to rely on. Why are they independent? These auditors are not paid by the company they audit but their very own bosses (the audit firm). The listed company will pay the audit firm for their service. But could there be some “connections” between the audit firm partners and their client? Well, the partners are fully and “personally” liable for any mistakes and wrongdoings. They signed on the report; they signed their reputation and business on the report. The partners can be sued for wrongdoings or even negligence. That’s why none of my friends want to set up an accounting/audit firm.
Now, if the auditor “qualified” the report, you can dump the annual report and move on to another potential company. Qualifying a report here is an accounting jargon. We don’t mean that the auditors give the company a certificate. By NOT qualifying a report means that everything is in order and nothing unusual was discovered from auditors’ random checks. In an unqualified report, the auditors will first explain their work and then form their opinion as such:
“In our opinion, the consolidated financial statements and balance sheet are properly drawn up according to the Act and Accounting Standards and give a true and fair view of the state of affairs…..”
“The accounting and other records required by the Act to be kept by the company…… have been properly kept……”
The first Para is telling you that the financial statements had been sufficiently prepared according to the Act and accounting standards. The second Para is telling you that the company has prepare and keep its accounting books properly. In sum, everything is OK! When the auditor qualified the report, they will say some other things like “we like to draw attention to….” or “we could not agree with a accounting practice by the company” etc. The worst opinion is when auditor “doubt that the company is still a going concern”. This means that company’s business may not go on for the next one year. In this case, you don’t have to continue reading the annual report anymore. In times of crisis or recession, this kind of opinion is more common than current bullish market.
To be continue……
