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How to read the annual reports of listed companies

The annual report of a listed company is an important report that comprehensively reflects the operating results and financial situation during the year. It is the primary basis for investors to sense the trend of securities price changes. The body of the annual report includes: company profile, summary of accounting and financial data, changing in share capital of shareholders, introduction of Corporate Governance, report of the Directors, report of Executive Officers, summary of business reports, significant events, financial reports, and other relevant exhibits about the company.

The analysis of the annual report is based on the truthfulness, accuracy and completeness of the information. If the information publicly disclosed by a listed company is false, seriously misleading or materially omitted, the intermediary responsible for the verification of the documents shall bear the corresponding legal liability, and all the promoters or directors of the company shall also bear joint responsibility. When analysing annual reports, it is important to use a comparative approach, which generally includes:

1. The actual indicators for the current period are compared with that of previous periods. The comparison is made in two ways: Firstly, by determining the amoutof change; secondly, by determining the rate of change. The calculation formula is as follows:

Increases/decreases = actual current period target - actual prior period target

Change rate (%) = (number of changes / actual target for previous period) x 100 %

2. Compare the actual indicators for the period with the expected targets. Thus, the company'smanagement can be assessed by the result. A good completion of the expected goals indicates that the company's management has more successfully grasped the market. Investors should also pay attention to the long-term planning of the company and analyze the possibility of achieving the long-term goal. However, it is important to check the rationality of the planned objectives. Otherwise, evaluation loses its objective basis.

3. Compare the actual indicators for the period to similar indicators of similar companies in order to recognize the place of the listed company in this industry.

In general, when analyzing the annual report, we will be aware of the size of book value. The larger the book value, the better the company's financial strength. It is also important to note the ratio of book value to fixed assets: a book value greater than fixed assets indicates that the company is financially secure.

Current assets - current liabilities = operating capital. The larger the operating capital, the more operating capital the company disposes. Investors should pay attention to the relationship between debt and net worth, a ratio of debt to book value in less than 50% indicates that the company's business is still healthy.

Certainly, when investors analyze the annual report,  they should recognize the existence of "trap".

First, pay attention to the sales margin. If the company does not have significant changes in operations, its sales margin should be relatively stable. If sales margin changesin the reporting period, it indicates that the company may under or over counting expenses, resulting in an increase or decrease in net profits.

Next, item is account receviable and payable. For example, some companies include some rebate fees in the accounts receivable account, which inflates the profit.

Third, pay attention to the provision for bad debts. Some receivables are uncollectible for a long time due to many reasons. The longer the age of the account, the greater the risk. Due to the low provision for bad debts in China, once the uncollectible accounts surges, the impact on the company's profits will be very large.

Fourth is depreciation. This is a great place for listed companies to make trap. Some of the construction in progress is not converted into fixed assets after completion so the company will be exempt from depreciation. Some companies do not depreciate according to the replacement value of fixed assets. Some even reduce the depreciation rate. These will inflate the company's profits.

Fifth, the tax refund. Some company's tax rebate income is not added in the capital reserve as required, but included in earnings. Some company will postpone the tax rebate period, which will all lead to misrepresentation of current profits.

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