R.E.C. Inc.’s staff of accountants finished preparing the financial statements f
ID: 424582 • Letter: R
Question
R.E.C. Inc.’s staff of accountants finished preparing the financial statements for 2010 and will meet next week with the company’s CEO as well as the Director of Investor Relations and representatives from the marketing and art departments to design the current year’s annual report. Write a paragraph in which you present the main idea(s) you think the company should present to shareholders in the annual report. Why do you think those ideas should be included? R.E.C. Inc.’s staff of accountants finished preparing the financial statements for 2010 and will meet next week with the company’s CEO as well as the Director of Investor Relations and representatives from the marketing and art departments to design the current year’s annual report. Write a paragraph in which you present the main idea(s) you think the company should present to shareholders in the annual report. Why do you think those ideas should be included?Explanation / Answer
Answer:
Company sharing annual report to shareholders:
Companies come out with their reports highlighting annual performance to its shareholders. These reports are primary source of information for an investor to understand the company, sector, management views and analyse the financials.
8 important things to consider while sharing annual reports to shareholders:
1) Vision and mission statements of the company
In this section, you will have vision and mission statement, values and goals of the company. These statements are general in nature.
2) Corporate information
In this section, you will get details of directors, bankers, auditors and registered and corporate office. Key things to look is designation of each board members, incase auditors are reputed they provide additional comfort to the company you are investing.
3) Products overview and financial highlights in last 5 to 10 years
Get details of products being manufactured by a company, segment wise performance in last two years, key raw materials consumed, etc. Some companies publish financial highlights of 5 to 10 years in annual reports. This section contains rend of revenue, earnings before interest, tax, depreciation and amortization (EBITDA), profit after tax (PAT/Net income / loss) from income (profit and loss) statement and also get a glimpse on shareholders equity, assets, debtors, liability and total debt from balance sheet over the years. Important ratios are also presented in charts over 5 to 7 years time line.
4) Director’s report
This section provides brief summary on financials, explanation of the financial results, key developments in the company. Key things to look in here are operational parameters of the company such as capacity additions, capex plan / executed during the year, order book as on financial year end, average length of stay, occupancy rates, average revenue per occupied bed, average revenue per user, etc. Terms used to discuss operation of the company varies depending on sectors so get some knowledge about industry terms or use glossary to get better insights. Read the past 3 to 5 years director report to see whether management has achieved the set revenue target over the years, whether strategies adopted over the years were favorable for company and did management able to perform during roller coaster ride of an economy. Also, look at the tone of the director report while reading annual report. Ideally, it sounds positive in good years and negative in bad years of the company performance.
5) Management discussion and analysis (MDA)
This section provides information on trends in the industry, SWOT analysis of the company, insights on key line items of financial statements and risk factors/concerns affecting the company performance. You will get relevant information to understand the industry while reading this section. It’s appreciated to read at least 3-5 years of MDA to understand trends of the company in different economy scenario.
6) Report on Corporate governance
This section gives insight on corporate governance followed by a company, composition of board of directors, brief background information on directors and independent directors of the company, attendance of directors in board meetings and annual general meetings, remuneration of directors, re-appointment of directors after completing the term, composition of sub-committees, etc. Key things to look here is composition of board of directors, sub committees and attendance records of directors during meetings, relate remuneration paid to directors with profits earned by the company. Analyse whether profile of independent directors match with the requirement of company as per sector of a company.
7) Information on shares of the company
This section provides information on historical performance of share price, share holding pattern of the company, pledging of shares by promoters during the year, split of shares, bonus shares distributed, etc.
8) Financial statements
This section provides detailed information on profit and loss accounts (income statement), balance sheet as on year end, cash flow statement and schedules of the financials for two years. Analyzing numbers from this section help us to check financial health of the company. We will explain in other article key things to look in financial statements for fundamental analysis of a company.
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