How to research a company in under 1 hour?
Save yourself hours from reading hundreds of pages of annual reports
Reading a company’s annual reports is part and parcel of the investment research process. Some people enjoy it, but most don’t.
Annual reports are often hundreds of pages long. This can be daunting for newer investors, who might not know where to start. Even if you’re an experienced investor, you might not want to do so. Zooming into the important sections saves you both time and brain juice.
To make the most efficient use of my time, I focus my attention on 4 sections of the annual report.
1. Read the “Business” section
Purpose: To understand the business model of the company
You should be able to answer the following questions after reading this section:
How does the business make money?
What products/ services do they sell?
Who are their customers?
2. Risk Factors
Purpose: What are the risks of that the company might face?
The primary question you need to ask:
What can go wrong?
Many people do the opposite. It is imperative that you protect your downside before looking at the upside.
3. Read the “Management Discussion and Analysis” section
Purpose: To understand management guidance for the business
What to look out for:
Recent operating results of the business
Direction of the business going forward
4. Use the financial statements to come up with a valuation of the company
Purpose: To assess how much a company is worth
There are 3 types of financial statements:
Income statement/ Profit and Loss Statement
Balance Sheet/ Statement of Financial Position
Cash flow statement/ Statement of Cash Flows
What items to look out for:
Operating cash flow (Cash flow statement)
Cash and cash equivalents (Balance sheet)
Long term debt and short term debt (Balance sheet)
Growth rate
For the purposes of calculating the intrinsic value of a company, I only use the balance sheet and cash flow statement.
If you need a template on how to value a company, you may use mine as a guide here.
Conclusion
These are the 4 sections I use in the annual report to guide my investment decisions. It’s one way for investors to be more focused when reading an annual report. This might not the best method, but it covers the bases that need to be covered.
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