Spring is the season when most companies listed on public stock exchanges hold annual general meetings (AGM) of shareholders.
Shareholders planning to attend those AGMs are well advised to inform themselves thoroughly of the company’s performance during the past year, particularly so given the challenges most companies are experiencing as a result of the current recession.
Make a Plan
Establish a plan before sitting down for how to review a company’s annual report and other annual general meeting documents. The job is not onerous. In fact, while some portions of the AGM materials need to be reviewed with care, others can be safely ignored.
The most important document is the Management Discussion and Analysis (MD&A). It is usually included in a company’s annual report, but sometimes is issued separately. If nothing else is studied, the MD&A should be.
Disclosure
A company with shares listed for trading on a stock exchange is obliged by law to disclose certain information to investors and the public. Stock exchanges and securities regulators require these companies to discuss issues affecting the company in clear, unembellished language. The MD&A is where the company must report this information.
Many less experienced will focus on the annual financial statements. However, the MD&A provides not only required disclosures but also a convenient synopsis of the financial statements. The financial statements are the second most important section of the annual report because they provide added detail for items disclosed in the MD&A.
Useful Ratios
In the current difficult economic environment, the healthiest companies financially will have little or no debt, have a large amount of cash in the bank, a record of increasing cash flow per share and rising earnings per share.
The best measure of financial well-being is the granddaddy of measurements: a steady growth in EBITDA – earnings before interest, taxes, depreciation and amortization. This is a calculation of how much the company earned (or lost) before deducting debt interest, taxes, depreciation and amortization.
The other key ratios to look for:
Cash Flow Per Share (CF/S): Divide the company’s annual cash flow by the number of shares outstanding at fiscal year end.
Price to Earnings (P/E): Divide the latest closing price by the earnings per share, fully diluted. Use this ratio to compare the performance of the company with per group companies.
Securities Websites
Other sources of reliable information are the websites provided by securities regulators in Canada and the United States.
Companies listed on Canadian stock exchanges must report information about their quarterly performance and annual performance as well as on any matters considered ‘material’, on a website called SEDAR (www.sedar.com). It is operated by the Canadian Securities Administrators. Companies listed on stock exchanges in the United States must report the same kind of information on EDGAR (www.freeedgar.com), which is operated by the U.S. Securities and Exchange Commission (SCEC).
The package of annual meeting materials received by shareholders should also include a formal notice of the annual meeting, and a proxy circular.
Compensation Reports
The AGM notice provides details of the date, time and location of the AGM, and normally discusses proposed resolutions to be presented to the AGM for approval.
This document also reports the salaries, bonuses, and stock options paid by the company to senior executives. Given recent disclosures of bonuses that a number of senior corporate executives in the U.S. paid themselves, this document is well worthy of careful scrutiny.
The AGM notice also provides details of the pay and attendance records of members of the board of directors. Directors have a legal obligation to look out for the interests of shareholders. Those with poor attendance records should be called upon to explain.
Forgettable Sections
The sections that have the least value to shareholders are the main article of the annual report, often referred to as the ‘theme article’, and the President’s Report to Shareholders, sometimes called the Letter to Shareholders.
The Presidents Report rarely provides anything of value in the search for substance. While many presidents and CEOs make an earnest attempt in their report to inform their shareholders of the company’s performance in the past year, and to describe plans for the coming year, they often succumb to pressures from within to enhance the positives and play down the negatives.
The ‘theme article’ makes no such pretences. It seeks to embellish the company’s virtues with unabashed hyperbole. This section can be safely ignored without running the risk of missing anything of consequence.
While the trend toward electronic annual reports and company blogs is growing, printed annual reports and company websites remain the most accessible sources of information for most publicly-traded companies.
