It is easy to assume that investors care only about the numbers – particularly the cash flows and financial performance, when they’re assessing a business or company.
While these are important, high-quality contextual information is also crucial for them to understand your business. Adding insightful context to the numbers enables you to communicate your company’s story, not only about the past, but also where the business is heading in future.
In a survey conducted by PWC, investment professionals were asked to consider the elements of formal company reporting, including annual reports, investor presentations, websites and press releases – any information provided by a company to the market. These professionals include analysts, portfolio managers, investment officers and research companies.
Why Bother to Have Quality Reporting?
The Management of a publicly-listed company has many demands on their time, so why prioritise corporate reporting? Because investment professionals said that the quality of a company’s formal reporting can have both a direct and an indirect effect on their investment decisions.
This impact is partly felt in relation to investors’ and analysts’ perceptions of management. In the survey, 80% of respondents said their perception of the quality of a company’s reporting affected their perception of the quality of its management. Only 7% disagreed.
The quality of reporting doesn’t only influence perceptions of management quality; 82% of investment professionals surveyed felt more confident in their own analysis when companies present information clearly and concisely. This could have repercussions for companies’ ability to raise finance over time.
Those perceived as providing clear and concise information could benefit from a lower uncertainty or risk premium.
The survey findings suggested clear repercussions for the cost of capital: only 11% of survey respondents did not believe that disclosures in an annual report about strategy, risks and opportunities and other value drivers could have a direct impact on a company’s cost of capital.
Even when investment professionals didn’t see a direct link, the quality of disclosures about strategy, risks, opportunities and other value drivers in the annual report could have an indirect impact on the cost of capital. This may help to explain the 26% of survey participants who neither agreed nor disagreed that a direct impact was felt.
These results send a clear message to companies: the quality and transparency of your external reporting is important. It affects not only investment professionals’ perception of you in terms of management quality, but can also have a direct impact on uncertainty premiums and your company’s cost of capital.
Your Annual Report Is a Powerful Communication Tool
The annual report is a softer, more accessible, easier-to-understand version of the company’s finances, business, and management philosophy. Besides containing financial statements including the income statement and balance sheet, and legal disclosures, it should also contain concise data with pictures, illustrations and colourful graphs. This single piece of communication can present a wealth of information about your company to many different target audiences. How they engage with the content affects their perceptions of your business in significant ways.
Each business is unique and the annual report can even vary from year-to-year. Some businesses really stand out for the quality of their annual reports; something you’ll come to appreciate as you grow your brokerage account and portfolio.
The survey shows that investment professionals considered a company’s overall explanation of its business model to be important for analysis purposes. Investment professionals want a clear understanding of how a company is positioned in its market and its operating environment.
This information is highly valued by them, but it is not necessarily communicated clearly by companies. Therefore, it is important to have a well-designed annual report, to help investors and shareholders understand your company easily so as to build their trust and confidence in your business.