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In order to evaluate a firm's performance, annual report and accounts are considered as a useful tool which records all activities of a company throughout the year. Nowadays, such financial reports are playing an important role in investor's decision-making. They are prepared to be presented to shareholders for approval which takes place at the Annual General Meeting (AGM) of the business. Besides that, the accounts are also filed with the Companies House to satisfy the legal requirement. According to the summary of investment expert, Dan Fournier, some important purposes of annual report are "You can use the annual report to assess a company's profitability, its potential for growth, to learn about its problems or challenges, or to find out about risks and other factors that may affect its performance and, inherently, its stock price.". This essay would give the overview format of an annual report and accounts and also discusses how information in the report can be used to analyze, understand market, productive and financial performance, using extended examples.
Firstly, this paragraph is going to examine all the information which companies must attached to their annual financial report. In general, the majority of companies present their report following a similar industry practice so that it is apparent to understand and make comparison between many companies. The annual report consists of seven sections, which can be listed as:
A financial summary - the key financial information
A list of the main advisers to the company: legal advisers, bankers, auditors etc.
The chairman's or directors' report
The statutory reports by the directors and auditors
The audit report
The financial statements: Income statement (Profit and Loss account ), Balance sheet and Cash flow statement.
Notes ( provide detailed explanation to the financial statement )
A 5-year summary key of financial information
(Paul M.Collier, Accounting for Managers, 2nd edn.John WLey & Sons,Ltd)
Financial statements are one of the most necessary parts in the Annual Report which is required for all companies listed on the Stock Exchange. The information included in this report can be used to evaluate market, productive, financial performance. These report and accounts give the investors the best source for company data allowing them to develop an understanding of the business and its trajectory.
Regard to how annual report and accounts analyze market performance ( eg: sales etc ) of a business, "one of the most important aspects of the performance of a firm relates to its success in recovering costs from sales of its final product or service sales and its overall market share" ( Neale and Haslam, 1994, 2nd edition, ). There are two ways to evaluate market performance: physical and financial method. Most firms have a physical output, for example cars, Tvs, computers. In order to examine how annual report assesses market performance, Toyota would be considered as a significant example for this analysis method:
TOYOTA DOMESTIC AND EXPORT SALES
Total sales bill ( yen)
Sales in Japan
Sales outside Japan
Ratio of Sales inside to outside Japan
Exchange rate yen to $
( Table 1.6 Toyota domestic and export sales and overseas production, Neale and Haslam, 2nd edition, p30 )
As can be seen in 1996, Toyota mainly focused on domestic market, domestic sales win export at the rate 1.45:1. However, in 1997 and 1998, there was a dramatic increase in sales outside Japan, which created a decrease in the ratio of sales from 1.45:1 ( in 1996) down to 0.75:1 ( in 1998 ). The explanation for this phenomenon could be currency fluctuation, as the higher the exchange rate, the better export would be. In addition, some interpretations can be derived from this data
( khong biet phan tich cai j them =)) )
The breakdown of sales is often disclosed in the notes to their accounts. From the information about sales by activity, the firm can decide which is more important than others. The table below would show an example of ICI's sales breakdown in 1991:
ICI sales and profit shares by division, 1991
Share of sales %
Share of profit %
Agrochemicals and seeds
Petrochemicals and plastics
This figure provided information about shares of sales revenue of ICI. The petrochemicals and plastics are recognized as the greatest share of sales at 21.9% but they only generate 9.0% of profit. At the same time, profit generation of pharmaceuticals is 42.7% while sales is standing at 10.6 %. The interpretation can be derived from this analysis is the firm concentrated on petrochemicals and plastics but it was not successful to gain the profit back. In general, the breakdown of sales let the firm compare and find out the importance of each division.
Besides, the annual report and accounts also enable audience to acquire the information on the geographic breakdown of sales.
( chua viet )
Apart from the success or failure in the market place, it's really necessary to assess the firm's productive performance. There are again two ways to get this analysis done: physical and financial.
In physical method, the factor mainly used to measure productive performance is productivity, in which the relationship between outputs and inputs such as car per employee would be particularly analyzed. An example would be examined by the table below:
Vehicle per employee
This table demonstrates an increased productivity from 9.8 to 13.1 cars per employee in spite of the workforce reduction of 31%. The situation reflects the falls in real sales and real value added. What can be referred from the productivity calculation is how Ford has performed over the last ten years; however, it is still not possible when making comparison between Ford and other company as firms do not performs the same level of work to produce a saleable output.
In addition, it is common thought that all firms in a line of business would doing the same level of work. The comparison between productivity of Toyota and Ford is a clear example for the different level of vertical integration. The term "vertical integration" refers to the difference in ratio of value added to sales, which can be calculated by value added divided by sales (all the data can be found in the accounts). From this consideration, it means "the higher the ratio, the greater the degree of vertical integration" ( Neale and Haslam, 2nd edition, p112). Some research has shown that Toyota produces twice as cars per employee as Ford US but it recognized later that Ford has a greater vertical integration than Toyota. To be more specific, Ford added more value to the product than Toyota and the value added is mainly labour cost. Consequently, Ford might use twice labour as Toyota so it can not be said that Toyota is more productive than Ford.
In many cases, the output is not disclosed in the annual report and accounts by the firm, therefore it has to be evaluated by financial terms, such as value added per employees. This method is a solution to the firms' variable output and the difference of vertical integration. Value added can be examined in two aspects: value added per employee and value added per GBP of fixed assets. The first one used to indicate the productivity of labour, for instance, the real value added per employee during 1980s of Ford UK declined but real value added per employee kept rising, which resulted in the higher productivity. The second one used to consider the productivity of fixed assets, this allows the firm to explore the use of assets through the Balance Sheet.
One more aspect that can be calculated from a company's annual report and accounts is "Stock turn over". The formula for this is dividing annual sales-turnover by the average over the year. Stocks refer to a financial burden for the firm so the higher stock turn ratio, the better the organization of production. In fact, different firm has different requirement about stock turnover, for example manufacturers like Ford would need a long time to finish output while a super market like Tesco has a quicker cycle time from purchase material to put it on sale.
The financial performance can be considered as financial effect of marketing strategy and physical production. In order to improve understanding of the business performance, it's value added framework that plays an important role in the analysis. Besides this, it's essential to take cash-flow and break-even into consideration.
Labour's share equals to the result when take total labour costs and dividing by value added. As a economic laws, a great portion of value added is used to pay the labour. Hence, if market sales fall, labour's share will surely increase. This will have a bad effect on profit, especially when firms write-off the depreciation of their assets each year. Tesco plc is an obvious example for reducing labour's share to enhance the profit margin on items sold.
Labour's share of value added (%): TESCO
( Neale and Haslam, 2nd edition, p116)
As can be seen in the table, the labour's share of value added of Tesco decreased after each year. Contrary to the decrease of labour's share, according to some reliable source of information, the value added for every 1 GBP of Tesco climbed from 12.6 pence in 1980 to win the point at 18.3 pence in 1990. A conclusion that can be illustrated from this case: "when sales volume falls, value added generated will also fall, labour's share of value added will increase and profits will decline" ( Neale and Haslam, 2nd edition). As a result, a firm with high labour's share of value added needs to find how to renormalize it, enhance sales recovery.If not, employment reduction is absolutely predictable.
Another point of financial performance is cash-flow, which is the remaining of "value added after labour's share is deducted" ( Neale and Haslam, 2nd edition). Cash-flow demonstrates how cash generative of a business and a strong cash flow would prove the ability to satisfy the claims of investment and profit distribution.
( chua viet duoc not, dang research not :D )
In this essay, it has been established how to use the published annual report and accounts to assess the market, productive and financial performance of the firm. As stated above, the value added concept provides effective tool to control and measure the firm's performance, especially productivity. Moreover, the analysis of annual report could be applied to consider a five to ten-year performance of the business, which can point out where the firm's level is if put in the comparison with its rivals. Consequently, the information of annual report would not also help investors to improve their understanding of the company but learn from experience of each firm success as well.
( nen dua recommendation j vao day ha a ? )