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The IC guide to company annual reports

Become a better investor with Phil Oakley’s insights into company annual reports - the most important document in any investors' toolkit
The IC guide to company annual reports

What is the difference between profits and cash flow and what matters more? How do I check a company’s financial stability? How do I read a balance sheet?

Seasoned investment analyst, Phil Oakley has the answers to all these questions and many more. His insights (in the links below) can show you how to get the most out of company annual reports to help make you a better investor.

Attempting to read a company annual report can be a bit overwhelming. But Phil believes that this document is the single best piece of information that an investor in a business can get their hands on. “It has always surprised me how underused they are’” he says.

“When you start looking at a company, I always think it’s a good idea to look at the numbers in the financial statements first and build up your own picture of it. This encourages independent and critical thinking, which is so important to investing and stops you from being influenced by what the management has to say. You should read that later, and see whether the view you have built up by looking at the numbers matches with theirs. Sometimes it will not.”

The following articles can ensure you make the most of this document by helping you understand the detail of the three main financial statements.

 

The Income Statement

How to read an income statement

In this award winning article, Phil uses the annual income statement from pub and brewery company Marston’s to explain the income statement, otherwise known as the profit-and-loss account.

 

The Balance Sheet

How to read a balance sheet

In the second instalment of his Marston’s series, Phil explains how to read the company’s balance sheet.

 

 

How a company’s balance sheet can mislead investors

Two of the most important figures in a company’s financial statements are its cash and debt balances. Yet sometimes, the figures on a balance sheet can mislead us. This article can help you understand these figures.

The Cash Flow Statement

How to read a cash flow statement

In part 3 of his series on Marston’s, Phil takes a dive into the cash flow statement – the best place to look if you want to get a better feel of what’s going on with a company’s financial performance.

Filling in the gaps

Company annual reports are text heavy. This is management’s opportunity to ‘sell’ their company to investors. Picking out the key messages is a key skill to becoming a great investor. This article can help you read between the lines and scrutinise a company report.

Glossary

Income statement

A summary of the revenues and expenses of a company in a given period

Revenue

A company's sales - literally how much money it collects from its customers

Gross profit

A company's profits after the cost of sales (how much it costs to produce the products) has been subtracted from revenue

Operating Profit

A company's profits after all the day-to-day costs of running the business (operating costs) have been subtracted from revenue

Operating margin

A measure of profitability which compares operating profit with revenue

EBITDA

Earnings before interest, tax, depreciation and amortisation. A measure of profits after stripping out key finance costs

Pre-tax profit

A company's profit after all costs, excluding tax have been subtracted from revenue

Net profit

A companies profit after all costs have been subtracted from revenue

Earnings per share

The value of the company's profits per share, calculated by dividing the net profits by the number of shares in issue

Balance sheet

A statement of the assets, liabilities and capital of a company

Non-current assets

Company assets that can’t be liquidated (and their value released) in a short space of time

Property plant and equipment

Physical property that is expected to generate long-term economic benefit, including land, buildings, factories and machinery

Intangible assets

Value of a business which can’t be identified by anything physical

Goodwill

If nothing else existed, how much is the brand worth

Long term investments

Anything that the company has invested in for the long term, such as joint ventures and bonds

Current assets

Company assets that can be liquidated (and their value released) in a short space of time

Cash and cash equivalents

Anything that can be immediately turned into cash

Net receivables

Anything that has been sold, but the company hasn’t yet received the money

Inventory

Stock. Keeping inventory low is a good sign of financial health of a company – you don’t want to keep much more product than you know you’re going to be able to sell

Net payables

Things that have bought but not yet paid for

Short term debt

Debt that is due to be paid back within a year

Long term debt

Debt that is not due to be paid back within a year

Shareholders equity

Assets versus liabilities and how much is left over at the end of the day

Net debt

The total value of all the short and long term debt minus net cash

Cash flow statement

Total cash flowing through a company in a given period

Free cash flow

Surplus cash generated by a firm's operations after tax, interest and capital expenditure

Operating cash flow

Cash generated from the operations of a company, excluding capital expenditure

Shareholder returns

Cash returned to shareholder by means of dividends, share buybacks or other schemes

Dividend

A cash payment returned to shareholders

Share buyback

When a company purchases its own shares in the market and then cancels them, reducing the overall share count