Annual Reports Reading

Hello you very intelligent and wonderful people. I do hope you are doing well and having a nice weekend.

I note when reading Annual Reports from various companies, i generally read it word for word but i am wanting to speed up the time it takes me to analyse businesses. I remember reading 10 pages on Sustainability in one report and it was very repetitive. Alot of it i could have skipped over. I tend to look at the financials such as the Cash Flow Statement on sites like Yahoo Finance. I please kindly wondered despite the financials is there any other important aspects of the annual report that i should pay attention to please, like the companies growth, business strategy please? Further from the contents is there certain aspects i could skip to which you might consider the most important please? If anyone could kindly please get back to me on this i would be forever grateful and it would mean the world to me.

Sending you lots of good wishes and i do hope you continue to meet all your dreams and goals with your investing. Take care.

Hello, I have to admit that I generally don’t actually read the annual reports of all the companies that I have shares in, I’m not like Warren Buffet and am happy with knowing what I consider to be “enough” about a company. There will be times I’m particularly interested or I’ll take a look if I see anything in the accounts that I’d like more information on. Then I will generally possibly read the Executive Summary, the Profit/Loss and Cashflow Summaries, possibly the CEO report. If I see a large cash outflow, I’ll check this is caused by new investment or improvements to the company, etc.

Otherwise, when researching or deciding whether to keep a stock, I’ll do an analysis based on the following when evaluating whether to buy the stock and might do so for my portfolio at least annually (and the great thing is most of the tools are on T212):

  1. Margins - gross, operating, net
  2. Returns - on Assets and Equity
  3. Dividend Yield - especially whether they’ve stopped or reduced dividends in the last 10 years.
  4. Current Ratio & Inventory Turnover - bear in mind some won’t have this, like investment trusts
  5. Price/Earnings (P/E) Ratio & Price/Sales Ratio
  6. Debt to Assets - very important, generally I’ll be wary of anything over 50% without good cause although this number will be higher for insurance companies like Legal and General.

There are other factors worth considering that I have to improve my knowledge on, such as competition or considering the long-term prospects of a company and you might find these addressed in the annual report. Legal and General for example has quite a bit of competition, it’s not got a “moat” as such. Or British American Tobacco raises questions about whether tobacco is a dying industry and therefore what are they doing about it. And while they are expanding into vaping and other alternatives, the question would then be whether that will be regulated and making their business harder too. Which all means that while they answer all my questions above pretty well, I’m limiting my holding in this company to quite a low number.

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GAAP to Non-GAAP reconciliation is very important for some companies (stock based comp or other one-offs can skew results).

Product, margin and growth strategy very important for growth companies (Adyen for example) Less so for established companies (Coke, Kellogg etc.).

Thank you very much for your responses, that was very kind of you. The advice you have shared is wonderful and i appreciate it very much.

1anrs that was a very helpful post and that has helped me refine my own strategy when i am evaluating my own stocks. I very much appreciate you writing such a helpful post. I really like you take a look at the accounts and then if there is anything you need more information on you will look into this further. Such as the Executive Summary, Profit/Loss, Cashflow Summaries and the CEO report. I really like you then listed what you based your analysis on for a stock, such as Margins, Returns, Dividend Yield etc. I really like your strategy and thanks very much for sharing your comments.

Wishing you a great day and i very much hope your success continues while investing. All the very best to you.

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Have you tried ChatGTP?

ChatGPT probably is no use at the moment. The training data is all pre-2021 so nothing from the last 2 years. Also, what people don’t really appreciate is that chatGPT is actually pretty dumb and has no underlying understanding. It can only tell you what colour a lemon is because it has “read” thousands of pieces of text that say its yellow and lemon and yellow therefore have a strong correlation but it doesn’t know what a lemon is or what yellow is. Thus, AI has huge potential in the stock market/trading (and is already used) but in its current form it would be hard to get good answers from a general purpose LLM (chatGPT) but the potential for an “expert” AI system that could compare the fundamentals and pipeline for every company is massive but that would probably mean that private investors were at an even greater disadvantage to the big investors with the resources to have those tools

Forget the pre 2021 part.

You can point it to a source, tell it what you are looking to pull out, the format, give it examples.

Think of it summarising and comparing the data from the annual reports in a consistent format.