Do you have a bank account? If so, you already know what accounts are. The simplest forms of them are our bank statements. They show our financial incomings (salary, etc) and outgoings (usually a lot more than the incomings from spending too much at the sales). Company accounts are basically just the same, with bigger sums of money involved. Money flows in and out of a business; money it owes and money due to it. Whilst we attempt (often unsuccessfully) to save some money, a company looks to make profits and use those profits to expand the business and make itself more successful, as well as to pay dividends.
Every business has to produce accounts. Essentially, the numbers have to tally, accounting for all the money coming in, all the money spent, money stored in assets such as land, plant and machinery, and money owed to other businesses or people. All companies are obliged to publish their results once a year. The bigger the company, the more stringent the rules as to which numbers they have to publish. And if the company is listed on the main Stock Exchange, boy oh boy, they really have to jump through hoops to keep the regulators happy (see Yellow Book). These companies have to show in writing how they fared over the year in an annual report. The regulators insist these results are published within six months of the company’s financial year end.
The annual report has to contain at least the following:
- chairman’s statement;
- profit and loss account;
- balance sheet; and
- cash-flow statement.
There is one major snag with accounts. Not just the fact that contemplating them is mind-bogglingly dull! The glossy annual report (that costs a fortune to produce in order to impress the shareholders) only represents a snapshot of the business at one moment in time. As it is issued a few months after the numbers came out, it is already out of date. It is easy to make excuses not to bother with accounts because they look so excruciatingly boring. However, dear reader, you have to jump this hurdle. It is important to get to grips with them and where better to start than picking up an annual report. If you are already a shareholder, you have probably seen one for your National Grid Transco or HBOS shares. Tempting though it might be to glance at the cover and hurl it in the wastepaper basket, don’t do it. Resist the temptation and instead, open it. Flick through the pages and accustom yourself to reading short little paragraphs. Look for the chairperson’s statement and read it. This is where you can glean some interesting information about the outlook for the company. At the very least you’ll get an idea of what it does to make its money.
Good information will, over the long term, help you to choose the right shares. If you can get comfortable with at least skimming through the annual report, it will provide a good foundation to enable you to decide whether or not you like the look of a company sufficiently to make an investment. The report gives you a feel for what the company produces, where its major sales are, and who are its most important customers. Remember to take note that it is the consolidated balance sheet and profit and loss of a company’s accounts that are relevant to you and not those of the parent company. Consolidated just means that the figures include all other businesses belonging to the company, adjusted for percentages.