How investors should read a listed company’s annual report

Annual reports can help to better understand a company’s financial position, with special attention necessary to any unusual findings in the auditor’s report

By Ricky Lai

It’s peak reporting period for Hong Kong-listed companies, which means the release of hundreds of reports on how they fared in 2023. After releasing those results, companies listed on the Hong Kong Stock Exchange’s main board must publish annual reports within four months of the end of the financial year and send them to shareholders at least 21 days before their annual general meeting. For example, if a listed company’s financial year ends on Dec. 31, it must publish its annual report on or before April 30 the next year.

Reading an annual report is one of the most important steps for analyzing a listed company, as investors can gain a basic understanding of its financial position, operating activities, as well as the market where it operates and risks it faces.

The annual report usually starts with an overview, including the company’s business scope, major products and services and its market, to give investors a basic understanding of its operations. That’s followed by official content, such as the chairman’s letter and management discussion and analysis, to elaborate on the company’s performance for the year, as well as its future strategies and goals. This section, despite being somewhat PR-ish, still can inform about the company’s strategies and operating environment.

The actual financial tables, including the balance sheet, and consolidated income and cash flow statements, are the most important part of the annual report. Such information can tell investors about the company’s financial position and operational efficiency, including its revenue and profit growth, asset and liability structure, and the sources and uses of its cash flow.

The notes in the financial results, such as accounting policies, connected transactions and details on significant assets and liabilities, can help investors to better understand the company’s financial position and operational efficiency. Investors should also pay careful attention to any unusual findings in the auditor’s report.

Last but not least, the annual report also contains corporate information such as reports from the board of directors and on corporate governance and environmental, social and governance (ESG). Investors should pay special attention to risk factors and the possible impact they may have on future operations due to issues such as competition, regulatory changes, and foreign exchange risk.

It is better for investors to have some accounting and finance background, or to seek professional advice if they don’t fully understand the annual report. In addition, investors should note that annual reports are merely one information source about a company’s condition, and any comprehensive investment decision can only be made after considering a range of other information sources, such as news reports, industry reports and market data.

Ricky Lai is secretary for a Hong Kong Stock Exchange-listed company and lectures part-time at various Hong Kong tertiary institutions

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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