How to read an Annual Report part 1: Management

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The one key indicator of how well your business is performing is The Annual Report.

Before putting your hard earned money into a business, make sure that you read up on the annual reports for the at least the last 5 years, preferably the last decade. This may sound like a lot of work, but you want to get a picture of the business before handing over your cash. In the end, it is better to discard one too many companies than invest in a rotten one.

This is part of my series on The Annual Report. Please read the other posts for other perspectives on the matter:

How to read an Annual Report part 1: Management
How to read an Annual Report part 2: Dividend

Management perspective

Let's start with the part that usually comes in the beginning of most reports. This is the part where the chairman of the board and CEO (chief executive officer) make tell you their view of the business. They should go over major events of the past year and tell their plans for the future.
By reading up on the past decade of reports, you should get a pretty good view of how trustworthy the top management is in what they tell their shareholders.

Is there passion?

Do you want the management team to passionate about the company, or only their own careers? Passionate people take the extra step and put in the time that is needed to get things going.

Do they include not only the positive side of the story but also the negative? 

All years are not success stories, that's the way of life. If it is a trend that every year is only described in positive terms in the report then maybe there is something left out.

In my mind this should be a deal breaker if the chairman and CEO leave things out in the communication to the shareholders, then maybe you should go find another business to invest in.

Are they focusing on the share price or on the value generating streams in their business?

If the main goal for the top management is the market price of the company, maybe it does not suite your long term investment plans. In other words, if you try to ignore the whims of Mr Market, shouldn't the businesses that you invest in do the same?

Management Turnaround

Is there a continued red line in the management? Does the CEO change every year?
You should be able to trust the management in your investment and trust is hard to build up.
Is the top management invested in the business (this may not be clear in a report, check the Insider Trading lists of your market to find out more)
Of course you cannot expect that a CEO stays a decade in the same company, there are numerous legitimate reasons to change the CEO and even the Chairman but in the long run, it should not require detective work to figure out the red line in the management structure.

Fulfillment of goals

Goals that are set one year, are they followed up and in the end fulfilled?

Here's the reason you should read back on annual reports over a longer period of time. You get the backstory. If the management is new, look up what other companies they have worked on and if they got things done there.

Conclusions

In the end the question to ask is:
Do you trust these people to operate your business on a daily basis.


Disclaimer. I am in no way an expert on capital management or investing. On this blog I only wish to share my findings, ideas and comments on current events and fields that interest me. I hope that my thoughts can entertain you. I expect that everyone reading take their time and do their own research before acting on anything read on this blog. Investing is not for everyone. E&OE.