The starting point for analysing a company is to read its report and accounts. Every company, whether listed on the stock market or not, is legally required to produce a set of accounts every year. Listed companies have to go further – the London Stock Exchange requires them to produce figures showing profits or losses halfway through their financial year. These half-year results are often referred to as ‘interims’.
Both interim and annual reports are essential reading material for any investor but to make the most of them you need to understand what you are looking at and be able to spot any potential problems.
Where to find the information you need
The profit and loss account
The balance sheet
The cashflow statement
Companies see the publication of their annual report and accounts as an opportunity to persuade investors what a great company they are. As a result you will usually find report and accounts look like marketing brochures, with impressive designs and pictures and printed on glossy paper. It is important that you don’t let this sway your decision about the merits of buying or selling shares in the company.
When annual reports are published, they are available to download free of charge from the Companies and prices section of this site.
All report and accounts follow a standard format. At the front you will find a report by the chairman and chief executive on the events that have affected the company during the previous year, together with an outlook on what future they see for the business. This part of the document is interesting but may not tell you what you really need to know about the company.
That information is at the back of the report and accounts in off-putting tables that look as though they have been designed to deter even the most conscientious of investors. Unfortunately it is here, not in the glossy trading statements that you need to focus your efforts.
This section of the report shows you how well the company has done over its trading period. It simply shows all the expenses incurred by the company, offset against the revenue it has earned. It will clearly show whether the company has made a profit or a loss and will usually show the same figures for the previous year for comparison purposes.
A company’s balance sheet is completely different to the profit and loss account. Instead of giving you the profit or loss over the entire trading period, the balance sheet tells you the company’s financial position on a single date: the final day of its trading period.
It is crucial to understand that the company’s financial position may have changed markedly from that day: it may have won a major contract, acquired a rival or suffered a severe downturn in trading.
As with the profit and loss account, the company will give figures for the previous year so you can compare where the company is now versus a year ago. Among the information the balance sheet will show is the company’s fixed assets, the change in the value of its assets (depreciation), and the company’s investments and the current assets. It will also show the stock and work in progress of the company, the money it is owed by debtors, the amount of cash held by the company, any liabilities, creditors, dividend payouts, share capital and the company’s reserves.
This part of a company’s accounts tells you how much cash has been flowing through the business. This gives you an important guide as to where cash has come from, how it has been used and, crucially, how strong the company is.
Monitoring a company’s cashflow is crucial because it can give you an early warning sign if the company is getting into financial difficulties. It will, for example, tell you what the cost of acquiring fixed assets has been and whether the company has taken out any loans or made any leasing arrangements.