Which Accounting Data Investors or Buyers Look For In An Annual Report

Before making a purchase or investing money in a company, a wise investor want to have more information about your competitive environment, i.e. the state of your company within your chosen industry. The first information you will be asked for is the business annual report. This is not a coincidence; the annual report can be used to get at the bottom of the following: Level of sales Return on capital Net operating margins

The annual report typically has all the current, past and future financial accounting information. This source is very useful in identifying different performance indicators relative to your competitors.

1. Level of sales The investor or probable business partner should be able to gain an insight from your sales figures and analyse whether your company is doing well compared to other companies or not. Is your market shares increasing or decreasing, and in which geographic locations you are making more sales? The sales figures are an indication of the business current state of health. However other information such as the overall size of the market and what is happening in your industry should help during analysis.

In the annual report, your investor will be able to understand the structure of your industry. For instance how many players are dominating the market and the prospect of it? If you are an investor interested in investing your money in a company, but need more information on a particular market, it is advisable to look for organisations such as the Competition Commission reports (UK). A business owner will also find valuable information on an industry and the major players within.

2. Return on Capital This performance indicator will provide a measure of your business competitive advantage. A for-profit organisation has for duty to make profits if it is to survive. Therefore the return on capital will show if the company is maintaining a realistic return on investment and measure it to competitors... This indicator is available in the annual report.

3. Net Operating Margins Also called net profit before interest and taxation, is an indicator of competitive pressures within an industry. An investor or business owner should pay great attention to this performance indicator, because it varies from industry to industry. A retail company could operate within 7-8%, when a telecom company could achieve 20%. Checking the trend of this performance, each year, will provide useful insight into what's happening. If you want to invest in a start-up technology company, you do not want to compare it to a retail organisation. You should compare organisations within the same industry.

Recent corporate scandals have shown that relying on the annual report alone is suicidal. Companies could inflate these numbers or omit to show financial liabilities in the balance sheets. In the end you will end up purchasing a company full of debts. Always look into other companies annual reports before making a decision.

Also, when comparing companies within the same industry, people should use caution. For example, a company may be in software designs and the competitor organisation in IT services. They are in the same industry, but with major differences in activities and over time the volume of sales in each company could be distorted by inflation.

Finally, each country, UK, USA, or France has different accounting practices, particularly when it comes to return on investment and net operating margins. So it wouldn't be wise to compare companies based in different countries, without taking into account those differential factors. Even tough some other national factors could play a big role (i.e. the growth of the telecom sector in Africa is different to that of Europe).

The annual report would contain other valuable information other than the three mentioned above. All of them are important in assessing the company competitive issues within a market; for example, the level of advertising budget. Some companies spend more money on advertising, hence the high level of sales, and others do not, but have a higher profit margin. A chocolate company in the Fast moving consumer goods (FMCG) market will tend to have a huge advertising budget, same for a pharmaceutical company.