5 crucial things to look for in the annual report of an ASX company that may give you an advantage over other investors

5 crucial things to look out for in the annual report of an ASX company!

The ASX reporting season is not quite over yet. ASX companies have an additional month to file annual reports. Some may have already submitted their report and released it at the time of their annual results, while others may only release a preliminary final report, with the proper final report coming 3 months after the end of financial. For companies with a July 1-June 30 financial year, this is September 30.

We strongly recommend investors read the annual reports in. full, because they provide details not seen in a company’s investor presentation or results announcement. You may not find trade secrets in there, but certain metrics required to be included can tell you a lot about where the company might be headed in the future, and to what extent management is telling investors the truth or if they are trying to cover it up. There are countless metrics to be found, but let’s focus on 5 in particular.

1. Net Tangible Assets

This metric is an obvious metric for property stocks, not so much for others. Nonetheless, you will find it somewhere in all companies’ reports. Typically it is presented as a specific figure per share, but investors need only multiply this by the number of shares on issue to see a figure for the whole company.

Net Tangible Assets (NTA) is a financial metric used to evaluate a business’ tangible (or physical) assets. It excludes intangible (invisible) assets such as goodwill, patents, or trademarks. NTA provides insight into the value of a business’ physical assets and can be an important indicator for investors assessing the underlying value of a stock. If a stock’s market capitalisation or share price is below the NTA, it might indicate a company is undervalued, or overvalued if it is above. A high NTA figure (generally speaking) may indicate a financially stable business, suggesting it has a strong asset base to cover its obligations.

That’s how you can use it to determine whether or not a stock is a buy or sell. But for generally determining the health of your investment, investors should look to see how it has gone relative to the year before. If a figure has declined, the company may have had to write down a significant proportion of its tangible assets, or record a larger than usual depreciation figure.

2. Revenue per customer

This is one you may not need to dig too deep to find – you may even find it in a listed stock’s results announcement or presentation. If a company is deriving more revenue per customer than 12 months prior, it is a good sign.

Although this figure may increase because of a large amount of new customers, it may also increase if a company is generating more revenue from certain customers. It may have convinced non-paying customers (in the case of businesses with ‘freemium’ business models like Spotify) to become paying customers, or to upgrade products or services to higher paying ones. If a company reports such a figure for individual segments or jurisdictions, this figure is worth a look at too. It can indicate that a company has been successful or not successful in jurisdictional or product expansion ambitions.

3. Difference between a company’s diluted and ordinary shares

In general terms, ordinary shares are the number of shares outstanding and available for trading right now. It typically excludes options. Diluted shares take into account all potential shares that could be issued through the conversion of convertible securities, such as stock options, convertible bonds, or preferred shares. This represents the total number of shares that would be outstanding if all potential sources of dilution were exercised.

If there is a large gap between ordinary and diluted shares, this indicates a big risk that your shareholding will be diluted as options or performance rights are exercised – so you will own less of the company than before – your earnings per share and dividend per share will be lower. If a company has performed well, it is easy to gloss over this fact – but investors should still be aware

4. Individual segment growth

It is amazing how easy it is to just look at a company as a whole without considering individual segments. It may not be accurate to simply suggest a business is a Sum of its Parts, but if individual segments are performing opposite to other divisions – it may be a sign that being a contrarian on such a company could be a wise move to take.

If one division is performing poorly, there is potential that it could have a greater impact on the company’s results in future years if nothing is done about it. But if a company has a bad result, yet has one division performing well, you may take it as a sign that a company will perform better in the next year – particularly if a company shifts its strategic focus towards this.

5. Gross profit or margin.

Investors in stocks focus heavily on net profit or EBITDA, but gross profit (and gross margin) should not be overlooked.

Gross profit represents the amount of money a company makes from its sales after subtracting the cost of goods sold (COGS). COGS is the direct costs attributable to the production of the goods or services sold by the company, including raw materials, labor, and manufacturing overhead. It does not account for other operating expenses such as salaries, rent, utilities, or marketing costs, so it’s a measure of core profitability before these other expenses are deducted. Gross profit highlights how efficiently a business is producing and selling its goods or services. It indicates how well a business is managing its production costs and directly related expenses. A company with a falling gross profit may have troubles – only most investors may not realise this just yet.

Gross margin expresses gross profit as a percentage of revenue. It provides insight into how much of each dollar of revenue is left after covering the cost of goods sold. A company with a gross margin of 40% would have COGS worth 60% of its revenue. There is no hard and fast one-size-fits-all rule about what it should be – although the company should ideally have some gross profit. It is a bad sign when a company cannot even make money from its core operations.

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