The figures that matter in an Annual Report are in the Profit and Loss Accounts and the Balance Sheet.

Profit and Loss Accounts

Turnover: Watch this figure carefully as it represents the income of the company from its sales.

What share of the total income has come from any business that the company is discontinuing or selling off? Was a large share from non-recurring income such as extraordinary profits from the sale of property or other investments?

Is the dollar value of sales up or down on the previous year? Is the gain due to more sales or to price rises?

What is the change in percentage terms compared with the previous year? If you are comparing sales in 2007 with sales in 2006, you can calculate the percentage change by the formula:

(2008 sales - 2007 sales) / 2007 sales x 100

Is the percentage rate of change rising, falling or leveling off against previous years? If sales increases are slowing down, the company may be heading for trouble. Was any fall in sales due to the company closing or selling businesses that were making losses? If so, does the company claim the moves will help future profits?

Expenses: Did costs go up this year? If they did, was it at a rate equal to, greater or less than the percentage change in sales? The company is performing better if the percentage increase in sales is greater than the percentage rise in costs.

How does the percentage change in costs compare with the previous and prior years? If expenses were reduced, then ask yourself why.

Profits: Look at profits before tax. Is the dollar value going up or down? What is the percentage change over the year and with prior years? Is the rate of change rising, leveling off, or worse still, falling?

Are profits as a percentage of sales rising? If the answer is 'yes' it means that costs are being kept under control and greater profit margins on increased or even the same level of sales will bring in higher earnings. This is good news for the shareholder.

Net earnings per share: These are usually found at the bottom of the Profit and Loss statement and show the amount of net profit that is attributable to each ordinary share, for example 15 cents a share.

A rising figure does not always mean that the company is performing better. Watch out for tricks. The company can fool you by selling off a factory or cutting down expenses on research and development to boost earnings. Read the footnotes.

Balance Sheet

This is a snapshot of the company's finances at the close of business on one day.

Assets and Liabilities

Assets are everything that the company owns. Current assets are things which can be turned quickly into cash. Liabilities are everything the company owes. Debts which are repayable within a year out of current assets are the current liabilities.

The difference between current liabilities and current assets gives you the net working capital with which the company runs its day-to-day operations. You should keep an eagle eye on the working capital. If this shrinks it could mean trouble as the company has less cash to keep its operations running smoothly, that is, it is less liquid.

You should note, however, that different industries need differing amounts of working capital to operate efficiently. For instance, you can probably run a plantation on relatively low working capital in comparison with total assets, whereas a departmental store group needs plenty of money going through to buy new stocks and to write down outdated items.

On the other hand, a company may have too much cash sloshing around in its accounts, that is, it may be over-liquid. Although the money may be earning bank interest, it may be a sign of inefficiency if the money could be put to other uses to earn a higher return.

Another useful measure of a company's liquidity is the current ratio which is the ratio of current assets to current liabilities. For example, if current assets total $1 million and current liabilities are $500,000 the current ratio is 2:1. However, as the ideal current ratio varies from industry to industry, there is no norm for you to follow.

Stockholders' equity or capital is the difference between total assets and total liabilities. Theoretically this is the dollar value of what shareholders own. And you want this to grow.

Long-term Debts

Another number to watch is the company's long-term debt -money which is repayable after one year. High and rising debt may be no problem for a growing business but it spells trouble for a company which is leveling out.
Look at the ratio of debt to equity. For example, if long-term debt is $2 million and shareholders' equity is $4 million, the debt to equity ratio is 1:2. A high ratio means that the company borrows a lot of money to finance its growth. This is fine as long as sales and profits are growing and there is enough cash to pay off the loans. But if sales fall, the whole company may slowly fade away.

Less debt and more equity is usually preferable as the company can then self-finance its growth. Otherwise, it will have to borrow more and pay more interest on loans. Alternatively, it may issue more shares and spread its earnings among a greater number of shares, diluting the earnings of its present shareholders, until the money invested from the issue of the shares begins to show through in profits.

Now, divide profits by shareholders' equity and multiply by 100 to get a percentage. This gives you profits as a percentage of equity and shows you how successful management is at making money for shareholders using shareholders' money. The higher the figure, the better.

How good is the company at sharing its profits with its shareholders? The answer is in the percentage of profits paid out to shareholders as dividends.
You have to be more careful here. A high percentage is not necessarily good. You want to be sure that the dividends are amply covered by current profits and that the company is not raiding its piggy-bank, or capital, to pay dividends.

Moreover, is the company retaining enough of its profits to finance its growth and ensure future profits and higher dividends for shareholders?