How to read and understand an annual report

The annual report is a yearly publication that a company sends to its shareholders, investors and other interested parties. In Vietnam, it must be published no later than 20 days after the annual financial statements. The annual report is usually available on the company’s website (in the investor relations section) as a PDF, or you can easily find it on cafef.vn and other stock information websites. 

The annual report provides the most direct and relevant information for investors and conveys the company’s key messages. For an investor, the annual report should be the first place to look for information – something Warren Buffett has mentioned many times when asked about his secrets for analysing and picking stocks. All the information in the annual report is official information provided by the company, and in particular its financial figures are audited.

Gathering information from the annual report

We will use Vinamilk’s 2020 annual report (ticker VNM – HOSE) as an example: 

The aim of this section is to give you a brief guide to reading an annual report. Reading every page of an annual report is not practical, so I want to share my own approach to reading annual reports: which information matters and which we can skip.

The structure of an annual report differs from company to company, as each is tailored to the company and the sector it operates in. Essentially, however, an annual report includes the following main sections:

• Message from management.
• General company information: history and development, lines of business, organisational structure and management.
• Report on operations for the latest year.
• Development plans for the coming years.
• Corporate governance report.
• Risk management report.
• Financial statements.

The first highlight is an overview of the company’s financial position over recent years. The information in this section may be presented as tables or charts. This part of the annual report usually compares operating and business indicators over several years.

These figures give you an overall view of the company’s size and business performance over the years; essentially, this section is an extract from the financial statements. Later, when we analyse a company in depth, we may calculate these ratios and many other key indicators ourselves, and by doing so you will understand the company and its numbers better. I will show you how to read its financial statements and calculate financial ratios in the following articles. Looking at the example above, we can see that VNM has grown fairly steadily in revenue, profit and total assets, but its ROE and ROA appear to have been declining over the past 3 years.

Next, the Message from the Chairman of the Board and the Message from the CEO are what I look at next, because they relate closely to the qualitative factors we listed in the previous article. Investors get a sense of how the company’s leaders think about their business. I want to see whether the management team is solid, and how the company’s vision and mission come through in their words. The message from CEO Mai Kieu Lien, who had held the post at VNM for 27 years, is well worth reading.

You can spot a few key phrases in her message, such as “digital transformation” and “ERP system”.

The next noteworthy section is the industry analysis. The view of the dairy industry from the No. 1 dairy company, VNM, is very interesting, because they clearly understand the sector better than anyone. You can gather useful information about the dairy industry, such as the ongoing M&A trend among domestic dairy companies, Vietnam’s per-capita milk consumption being 18% lower than that of neighbouring countries, and the opportunities that EVFTA brings to the dairy industry.

Which issues matter most depends on the nature of each company’s industry. For example, if I am reading the annual report of a textile and garment company, I pay particular attention to changes in wages and the number of workers, as it is a very labour-intensive industry. Other issues often covered in the Executive Board’s report include production scale, raw material sources, research and development, and so on.

The last section to pay attention to in the annual report is the company’s future development plan, which shows management’s vision and the changes to the business in the period ahead. This is considered the main driver of changes in revenue and profit, which feed directly into the share price. 

You can follow the company’s plans for the coming year more closely through another very important document – the resolution of the annual general meeting of shareholders.

We will meet again in the next article, on an equally exciting topic: How to read and understand financial statements.

Happy trading!

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