Insight into the health of a company

Financial reporting is the cornerstone of investing. It’s when the market as a whole gets to look inside a business to see how it is performing. Revenue growth, profitability, cash generation and a whole range of financial ratios can be dissected to get an understanding of the company’s health. This, in turn, helps investors decide if they want to invest, or remain invested, in a stock.

It is for this reason that most exchanges around the world put fairly tight criteria on the publication of these results. In the US, for example, a listed company has to publish results every quarter, which makes it feel as if it’s just a rush from one set of results to another.

But I agree that more information is always going to be better than less. The one concern around quarterly reporting is that executives become far too short-term in their thinking. Although, reporting every half-year isn’t going to make much difference to a short-term thinking executive.

In South Africa, the JSE requires companies to publish results every six months, at mid-year and at year-end. Companies will have different year-ends but most are either December or February, with mid-year then being June or August.

Furthermore, these results must be published within three months of the end of that period. Failure to publish within three months will earn the company a sanction and if the results are not published within four months, the company’s listing on the JSE will be suspended until such time as the results are published.

There are always a few of the small- and mid-cap stocks that fail to meet the four-month deadline, and for me this is a massive red flag. If large, complex Top 40 companies can publish results twice a year within the required three months, surely it should be easy for the smaller companies?

A delay in results usually means a lack of systems within the company. This could include systems to spot fraud, manage the business and results process, and many more.

A company missing the deadline becomes insupportable for me. If ever a stock I held missed a results deadline, I would exit it as soon as possible.

It is also important to understand that the mid-year results are not audited, and often the year-end results are also not audited at the time of being published on Sens. This is perfectly within the JSE rules. But if the year-end results were unaudited at publication, they still need to be audited by a JSE-recognised auditor and any adverse audit opinion reported via Sens.

Another important document required by the JSE listing rules is the publication of an annual report.

Results are great and give an investor a lot of information to work with. But the annual report is chock full of information and will also always include the full audited results. In the annual report you’ll get details such as each director’s holding in the company as well as details of their remuneration. The annual report will also include a lot more information on depreciation, goodwill and valuations of the various assets (especially plant, property and equipment) and how the company applies these principles. You’ll also find details on debtors and creditors as well as potential risks facing the company.

As mentioned, results are published on Sens, but they will also be on the company’s website. As a shareholder, the annual report will be posted to you (unless you request the company to save trees and not bother posting it). The annual report is also available online to anyone, investor or not, and this is where I read them.

This article originally appeared in the 11 October edition of finweek. You can buy and download the magazine here, or subscribe to our newsletter here

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