Adding this to the Understanding Financial Statements series as I've started to realise that this is another area where we can gather more insight into the companies that we are investing into and help us make a more informed decision before investing.
If you want to see the previous parts, you can see them here:
Part 1: The Income Statement
Part 2: Balance Sheet
Part 3: Cash Flow Statement
Part 4: Financial Ratios
For this part, I'm going to share some of the more useful parts that I've found in the notes to the financial statements when trying to look for more information into the company (But then, some companies have sections that other companies do not, so this is just a rough guide at best).
Revenue
A breakdown of the sources of revenue is given here (there's usually one earlier in the annual report as well), which can be useful in seeing which industries and business are important to the company. Especially for conglomerates with businesses in many industries, looking at this note (from what I've noticed, it's usually number 4) can help to more accurately determine the impact of each industry on the group as a whole by seeing where most of the revenue is generated.
Investment/Development properties
With the property market being less optimistic in some countries now, it may be good to take a look to see if the company owns any development properties or any investment properties and the areas in which they are located in, as well as some other details about them such as their purpose. For me, I was quite surprised to learn that YZJ, a shipbuilding company also had some development properties, so it may be worth checking out if the company has any investment/development properties in the balance sheet and if so, look here to see if you can find more details about them
Share options
This is something that should be paid attention to as some companies offer share-based incentive plans, offering restricted shares or stock options, which would have a dilutive effect when they are vested or when exercised. Here are more details which may include the exercise price and the number of shares issued under the various plans and their exercise period, which may give a better idea on how many will be exercised based on the current share price.
Exceptional Items
It's worthwhile looking at the exceptional items that may cause a huge swing in the company's income statement such as the disposal of a subsidiary. Sometimes, the other income/expense section may also have a note, which may also be worthwhile looking at to see whether a sudden increase or decrease in profit is due to these exceptional items that are not part of the company's core business and better determine whether they are able to affect the company in the future.
Summary
The notes to the financial statements will differ from company to company and this is just a rough guide to some of the areas which I've started to take an interest in the notes to the financial statements. The other notes are also worthwhile reading when you are planning to invest in a company to prevent any unforeseen surprises and I hope this is has shown that the notes to the financial statements are a very useful and informative portion that we should pay attention to in addition to the income statement, balance sheet and cash flow statement.
Which are your favourite go-to notes to get a better idea of the company?
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