25 May 2009

Investor-friendly annual reports


The annual report should be investor-friendly, easily understood and serve the information needs of shareholders and prospective investors. It should present sufficient information and illustrative data so that a prospective investor does not have to spend much time researching the company. The aim of the annual report should be to help expedite the investment decision-making process of potential investors.

The annual report is more than a mere disclosure document required for continued listing. It is a powerful medium to convey the company’s investment value proposition.

This is especially important for small listed companies that do not have many avenues, other than annual general meetings, to communicate with shareholders and the investing public. Such companies, which may not be covered by investment research analysts and are either too small to be the radar screen of institutional funds or are not sophisticated enough to solicit investors, should let their annual report do the talking.

There are many ways to present an annual report. Some companies include many pictures of their business operations and happy employees. These do make an impression on investors, but often do not say much about the company. On the other hand, adding a few tables, charts, commentaries and ratios can help make the annual report more interesting.

Here are examples of what some leading companies have included in their annual report.

Tables on changes in share capital
Some companies provide tables that show the changes in their share capital over time. A company may have a share capital of RM200 million today when 10 years ago, at its initial public offerng (IPO), its share capital could have been RM40 million. The number of issued shares and par value may have changed a number of times since the company’s inception. So, how did it get to where it is today?

By providing a chronological table of corporate exercises, say, share placements, rights issues, bonus issues, new share issues for acquisitions, capital repayments, share splits or share consolidation, investors will have an idea of the how the company was capitalised over time. Prospective investors would see the history of corporate activities at a glance rather than having to go through repetitive corporate announcements and figuring things out for themselves.

If, say, at some point there was a share capital reduction, investors who may not have watched the counter for some time would then learn the fact and be pleased to know that the company had made a capital repayment and returned money to shareholders.

Similarly, if there was a bonus issue, the prospective investor would understand that the company had at some point in time accumulated a sufficiently large share premium account that allowed the bonus issue to be made.

Share price activity chart
Some companies provide charts that show their share price movement over a few years, benchmarked against the market index, with descriptions of corporate activities and events.

When the company is dynamic, with many new ventures, markets, acquisitions, contracts as well as challenges, such a chart helps investors understand the impact of economic and market events and business activities on the share price of the company. It also gives an indication of the potential share valuation of the company.

Third-party industry commentaries
Companies often provide remarks on their industry, usually in the chairman’s or CEO’s statement as part of management discussion and analysis. To substantiate the remarks, some companies quote industry authorities (with permission). They include relevant paragraphs or data from various sources for a third-party voice that adds credence to the company. Such information could be from industry journals, rating agency reports, central bank reports, economic reports or market data research reports from local, regional or international sources.

The casual investor may not have access to industry data and reports. By including such commentaries in the annual report, investors get a macro view of the company and its industry. At the same time, the viewpoints show depth in the company’s assessment of industry issues.

Benchmark ratios
Companies often give 5 or 10-year financial highlights comprising the usual top and bottom line numbers. Some go further by providing 5 or 10-year ratios. Profitability margins and return ratios, debt and cash flow ratios, dividends, price-earnings and investment valuation ratios as well as various relevant operational ratios give the company’s investable proposition an added dimension.

Providing a set of historical ratios saves one from having to retrieve past annual reports and crunch the numbers. Although such ratios are available from the likes of Bursa Station and Bloomberg, most retail investors do not have access to such market data aggregators. Benchmark ratios also help research analysts get the indicators quickly.

Investment decisions are not made after just one look at an annual report. Still, a good annual report that contains analytical information in addition to the usual quantitative and narrative disclosures helps increase the chances that a potential investor will study the company further. Of course, investors could do their own research but few have the time to dig deep into one company, especially a small one, unless their interest is piqued. Therefore, it’s better to present a clear picture of the company to investors at every opportunity, and the annual report is one of the best mediums to do that.

This article was published in The Edge Malaysia on 25 May 2009.

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