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Interpreting company reports and accounts

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2. What to look for in the directors' report

The directors' report is a statutory requirement and its content is partly determined by the Companies Acts.

Among other things, the directors must provide:

• a fair review of the progress of the business during the year, together with an indication of likely future developments
• the names of the directors and their shareholdings in the company
• important events affecting the company which have occurred since year end
• policy for payment of suppliers

So in general the report is well worth reading. In fact, it is probably the best place to start because it may tell you about something that has happened in the course of the year which invalidates direct comparison of figures between one year and the next. It's better to find that out straight away, rather than ploughing into the P&L, only to discover later that year-to-year comparisons were pointless.

One of the most interesting aspects of the directors' report relates to control and ownership of the company.

• A close company (where 5 or fewer persons have control) is a more difficult bid target for another company
• It is also less likely to grow through acquisition because the directors will be reluctant to dilute their interests by issuing new shares
• If the main director shareholder is approaching retirement, and there is no obvious successor on the board, he may well be looking to sell out at some point soon.
• Have there been any additions to the board - in particular of people with a known track record?
• Are there any non-executive directors? Too powerful a chief executive, unchecked by a strong board of non-executives, can be dangerous.

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

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