Things to look at in an annual report
How to do your investigative work!
Hello!
I wrote this thread on twitter and it seemed that it appeared useful!
I regrouped here all the different points. I hope you enjoy it!
Management incentives. Some can give you some big tells and/or can be quite inventive.
Related party agreements. Always check them out as the bigger the list the bigger the red flag. See how it evolves as time goes by. Do their number decrease or increase.
IFRS 16 has big impacts on D&A and financial debt.
Effective tax rate//normal tax rate. The bigger the difference the more interesting it is to investigate.
Tax loss carry forward. How much and can they use it?
Exceptionnal costs. Do they repeat themselves or not. If yes they are not exceptional.
Minority interests. Don't forget to take them into account. Some companies have lots of them.
In the subsidiaries, what is the percentage held by the company. Always a pity when the most profitable ones tend to have big minority shareholder (although it could a rare partner enabling to get the market).
Are they lots of changes at the level of the independent board members. If yes well it is not a good sign. Are the independent administrators really independent?
Does a company suddenly change the quantity of information which it gives out? If yes then why are they doing it?
Is a company changing how it is doing its financial communication? More analyst meetings, more sponsored research, more investor forums.
What is in the "adjusted" when there adjusted EBITDA or adjusted EBIT?
How are the head quarters when you visit them? Need some refreshing: good they are stingy.
Change in the number of years a company depreciates an asset. Why are they doing it?
How much D&A in the EBITDA? The more important the D&A item is in the EBITDA the more you have to investigate and make sure of the quality of the EBITDA.
A company has treasury shares. Why are they not cancelled? Sometimes it is because they are just covering a share award.
When looking at the cash flow from operations, look at all the items especially so as the list of items is long. Of course if it share based compensation it is an expense full stop you can't put in the CFO to boost it.
Share count don't forget to rake into account all the convertible items which can add a lot of shares.
Look at factoring. How much is there? You have to take it out from the cash position. The real danger is the unconsolidated factoring.
Everything is in the footnotes. The smaller the font size the more intrigued I am.
Always look when there is an asterix. There is always some interesting information to investigate upon.
Which information disappeared from the previous year and why? Usually it is interesting information...
Sometimes the information you can't find in the annual report is the information we should have. Why? I.e: I can have the sales number of a geographic area but I won't have the operational margins by geographic zone... must mean something which needs to be investigated upon!
Look at the investment property assets. It is a nice source of hidden assets as they are valued at historical cost in the balance sheet but the company usually gives you the fair value. The delta helps valuation.
Have a look at fines and ongoing procedures (tax, competition authorities fines) as sometimes they can get reversed and be favorable to the company (reversal of provision).
Cheers!
Jeremy