Interpreting company reports and accounts

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1. The five main components of a set of report and accounts

Most published accounts contain a mixture of hard information and soft information.

There are five sections that offer hard information:

1. The Directors' Report
   This tells you what the company does, who its directors are, and what their stake in the company is. It also states whether there have been any significant business or financial developments during the year, and provides a brief review of the year's trading.
   Significance: provides a short overview in words rather than numbers.
2. Profit and Loss Account (P&L)
   This summarises the result of last year's trading in figures. It tells you what the company sold, what its costs were, how much profit it made, what the tax charge was, what was left for shareholders, and how much of this is being paid out to them in dividends and how much ploughed back into the company. It also gives comparable figures for the previous year.
   Significance: hard numbers which you can subject to ratio analysis. Important.
3. Balance Sheet
   This provides a snapshot of everything the company owes and owns at the end of the financial year in question. It tells you what its assets are and how they are financed. Where the P&L tells you how the company has performed in the previous year, the balance sheet reveals its fundamental health.
   Significance: if the company is having problems, the balance sheet (together with the cash flow statement) will tell you whether it can stand the strain.
4. Cash Flow Statement
   This compares the amount of cash coming into the company from trading profits, investment, more efficient debt collection and so on, with the amount flowing out from trading losses, tax and dividends. Then it adds or subtracts the cash produced by capital raising or spent on capital repayment.
   Significance: companies have to pay their bills with cash. If they run out of cash they may go under.
5. Auditors' Report
   This tells you whether the accounts prepared by management reflect a true and fair view of affairs and meet the legal and regulatory requirements.
   Significance: if the Auditors' Report is qualified, beware.

1. The five main components of a set of report and accounts 2. What to look for in the directors' report 3. What to look for in the P&L 4. Earnings per share (EPS) 5. Price earnings ratio (P/E) 6. What to look for in the balance sheet 7. What to look for in the cash flow statement 8. What to look for in the auditors' report 9. Other information sources 10. Conclusion