- [Richard] Hi, welcome to Module Four, Reading Company Accounts. Nicole's asked me to do the section, my name is Richard. So the aims of the section, are to learn how to find out how profitable a company is. And then learn how to find out how much the shareholders and directors are making. And through looking for these things, these three things, we're going to be learning a bit about how to read company accounts, how to understand them. 

Now, obviously we're not going to become accountants. We're not going to understand by any means every line of the accounts. We're not going to understand most of what's in the accounts after this but. the aim of the session really like the overall aim of the session is to give you confidence to be able to go into a set of company accounts, and get out these two key bits of information. And so three key bits of information the shareholders and directors pay. Yeah, and to build confidence to do that without feeling like you have to understand all the jargon. 

If you want to get more into this and do more of this, there's a link under the video to our DIY handbook that has it a few pages with with a lot more detail and depth on reading company accounts, it has a glossary of terms, explanations of the key terms in there. And it also has links to other guides to understand the accounts. So please use that after this. So before we start a quick context on what accounts are, so companies are legally required to publish their accounts every year and at most nine months after the year end. So the accounts we're looking at are always, they're always back in time. They're always looking at the previous year and then smaller companies don't have the same disclosure requirements as bigger ones. 

So we're going to use Asda as our case study. Which is obviously a very big company, and it gives you a fair bit of information and its accounts, unfortunately smaller companies and by smaller, they mean companies with sales of turnover of less than 10 million, assets of less than 5 million or staff less than 50. They don't need to give you as much information, which basically just what the regulations say but they should at least give you a balance sheet, and we are going to look at what a balance sheet is as part of this. So before we go to the next slide, let's go back to, let's go Asda Stores and use that as a case study. So Asda Stores Limited is the company that runs as the supermarkets across the UK. 

Now the accounts we're looking at here are from 2017, that useful for our purposes. We've got the information that we need to show you. And I got these from company's house. Now Nicole's already gone through where you can get accounts and annual reports from. So Asda Stores Limited, it's a privately own company. In 2017 it was owned by Walmart. So you get these accounts from companies house. If you were looking at PLC like Tesco, their accounts will be included within the annual reports. And they'll be a lot glossier than this, but effectively they're doing the same thing and the information will be, that they follow the same rules and principles whether it's a PLC or limited. But they'll just look a lot more glossier and have a bit more possess. The nice thing about a PLC annual report is you can use control find to search particular terms but you can't do that with PDF from company's house because it's photocopied. 

So yeah. So if we go, scroll down to the contents again, this will be a common set of contents across accounts an annual report, like that Tesco's these first, the reports in at the front will be a lot, lot longer, but they'll still, they basically split it into two, but they'll have a report where management will tell you how the company has done over the last year. And kind of give you their spin on it, and then you'll get the accounts proper, where they actually lay out the accounts for you. And in these accounts that starts with the income statement, as it will in most of the accounts that you look at. You'll notice before that there's an audit report. So that's a third party firm that's meant to check the accuracy of the accounts and they give you a report. They tell you, they should tell you that the accounts are accurate. 

So we're going to skip through that now, we're just going to go straight to the accounts proper. There'll be lots of useful information in those reports but it's written it is written in kind of normal, normal rights in normal English. So you'll be able to definitely have a look at those but we're going to go straight to the accounts about that here, so you can get the hang of that. Okay, so we scroll down to page 12. We are now in the accounts. So there was the auditor's report. That's a sign off of the auditor's report. And then the accounts proper start here and it starts with the income statement. 

So that might also be called a profit and loss statement in the company that you look at. but what the income statement tells us, is it tells us how the company has performed over the last year. So our first question, our first aim of this session how much profit is it making? You can see that we can get that from the income statement. You can see at the bottom here. It gives you the profit for the financial year. Now, we go back to the top now to try to understand that a bit more. 

There are a few things that you always want to check when you're looking at a set of accounts, when you're looking at a particular page of the accounts. The first thing is the date. So make sure you're looking at the year that you want to be looking at. I want you to know which year you're looking at. So in this case it gives you two years. It gives you the year ended 31st of December, 2017. And it gives you the year before that, it's actually useful for comparing. Obviously make sure if you're saying Asda made this much money in 2017, so make sure you are using the 2017 column. 

And then it gives you this pounds and underneath that. Now that means the numbers that we're looking at are in pounds sterling, and that we need to add a million to them. So the M stands for million. So pound million, but you need to add them there in pounds and you add a million onto these numbers. So obviously that makes these numbers much, much bigger. So here we have 21,951.8. So we need to add a million to that. So that becomes 21,951 million, or put another way 21.9 billion or 22 billion. If we look down at that profit figure, we start with we saw at the beginning 301 million. So Asda made a profit of 301 million in 2017, so it's an obvious point, but you want to just make sure you're adding that million on, you always check it's called a multiplier make sure you're always checking that. So you're getting those figures accurate. 

The other ones you might see are a pound zero, zero, zero. So a pound with three zeros. And that means you have a thousand dollars. So if it's at zero, zero, zero, there that will be 21,951,000 or 21.9 million. So it'd be 21 then, and then six effectively zeros. So the other one you'd see is just a pound. And that that's, you don't add any zeros on to that. And then you'll see in the middle, are these things called notes. Now these are really important, what they do is they give you more information about each of these figures. So note two, gives you more information about the revenue. Note three, about the operating costs, et cetera. 

So we'll do revenue and then we'll look at the note for it, but really the way to read accounts, it's not page to page it's you start with the income statement the one of the statements at the beginning, and then you go through to the relevant note and then you come back to the statement, and go then go to the relevant note for the next line. So what you see the income statement does is it gives you that overall profit figure, and it shows you how the companies got there. The first line is revenue, and this is just jargon for what the company sold in this year. So the value of all the company's sales in the year. So in this case, we're looking at Asda so it's everything that it's sold in the supermarket. So everything that we've bought from Asda Supermarkets over the last year has totaled 22, 21.9 billion pounds. So people have spent 21.9 billion pounds in Asda Supermarkets in 2017. So that's the money that's coming into the company. And then, it then shows you how much that cost for us to sell those goods. So for us, that that's going to be employing staff, So the people who work in the supermarkets. And then buying the things that are sold, so buying those products that they sell in the supermarket. And a whole host of other stuff, head office costs, management, et cetera. So they totaled 21.6 0.7 billion. And note that that number is in brackets. 

So if you see a number in brackets in the accounts, you treat it as a negative number. So the revenues and money coming in, that's money that's positive to Asda. The operating costs money that they've spent is going out, So you treat that as a negative. So that's taken off. So you have revenue and you take off the operating costs and then you're left with what they call an operating profit. So see what the statement's doing is, it's got these these headings. So it shows you revenue and operating costs. And then it tells you what's left as a result as the operating profit. And then it's got another set of items, it tells you what's left as a result of them and another one, and then what's left overall. So that's why it's set out like this. 

So watch out for these lines and the subheadings, cause that's telling you, it's basically totalling it up at every stage. The reason they do that is so that investors can get a sense of the different parts of the business, how much money they're making from each. So yeah, that's your operating profit. So that's the money that it's making from its business operations. Again, you can compare it to the previous year, it's gone down a bit. And then financial income. We can look in note six for more information on what that is but that could be interest the company's making or other gains that the company's making in whatever financial investments it has made. And then financial costs. This will normally be interest. So that's interest payments the company has been making on any loans it has taken out. And then you get another profit figure there, profit before tax, and then you get the tax. How much it's paying, so how much is tax bill for the year is, it's negative, they've made a profit or they've been taxed. Again, they should be taxed on that profit so they're declaring a tax bill. Once the tax is taken off, you get the overall profit for the financial year. So I would say, if you're going to take one profit figure, use that one. So Asda sold 22 billions worth of goods in 2017, and from that, it made a profit it was left with a profit of 301 million pounds. That's the kind of the big picture summary, if you want more detail on it, again, you follow the notes. 

So we'll just do one note, look at the note for revenue, note two. So there you go note two, so sorry, sorry, the notes start after the main statements of the accounts. So we're looking at note two for revenue, note two. Maybe to read that at your leisure the links to these accounts will be under the video for our purposes here, we just see here, you see they split up then where the revenue comes from. So sale of goods, that's going to be sales in the supermarket. There's 19, another multiplier so 19 billion of those, and then another 2.9 billion in fuel so petrol sold at a service station, sold at the Asda petrol stations, in Asda you would expect the vast majority of that money to be made through the supermarkets, but for some other companies a bigger company like G4S for example, you would get some quite interesting information there about how big different parts of the businesses are. 

So for example if you look at Apple, they'll tell you here how much they're making from iPhones as opposed to iPad, whatever else. For G4S, they'll tell you how much they're making from prisons compared to security, like private security so that can help you get a sense of the business and see what's what the most important bits of the business are for it and its management. So that's an example of one note. And so basically we've now done, we now done the the first one of our tasks. That one of our aims that we've said, we've gone to the income statement and we found how much profit the company has made. And we've also learnt how much it sold to make that profit and some other kind of basics of accounts. So yeah, hopefully you can take your company that you're using and you can find similar information. You find the same information about it. 

As I say, sometimes it's called profit and loss statement and it will be usually, it usually be the first statement in the accounts. I did mention at the beginning, that some companies some smaller companies won't give you an income statement, they'll only give you a balance sheet. So the balance sheet is another one of those statements right at the beginning of the accounts, not going to spend too much time on this because it will take, it is a big like naughty thing that takes a long time time to understand fully but effectively what it tells you is, how much the company owns and the jargon for those assets. So it shows you the complete assets that it owns. So here you get halfway down the balance sheet, you've got a total assets against a note, the multiplayer so that's 10, 10.4 billion pounds in assets. 

And again, it gives you kind of summary of what they are. So the biggest one for Asda, as you probably expect other buildings, so property plant and equipment. So the stuff that kind of physical stuff they own. So the stores, the van, all of that, so they've got that worth for 4.36 billion. And then the notes will give you more information about those, so you can follow those. 

So you start off with what the company owns, the assets and then you have the liability. So this is everything the company owes. So that's going to include things like wages, it might also staff, invoices it might owe to suppliers, any tax it owes and loans it owes to lenders. And then it gives you total liabilities. And then the accounts take off what the company owes from what it owns. So it takes away the liabilities from the assets and what's left is the equity, effectively what the company is worth. Normally balance sheets will be up to, we'll be at the bottom. In this case, it's in the middle, it still doing the same things. So Asda as is worth according to its accounts it's 5.25198, 5.25198 million, or 5.2 billion pounds according to the accounts. 

As part of that, it shows your retained earnings. So one of the lines in retained earnings, inequities retained earnings that shows you how profitable it's been over its life minus any dividends that have been paid out to shareholders. We'll look at in a second. So basically the point of this is, if you're looking at a small company, that's only giving you a balance sheet, you can get some kind of, you start to get some kind of sense of whether it's doing well or not from the equity, it's equity figure and if it gives them the retained earnings. If that's a nice healthy positive number, it's suggest that the business is doing quite well. If it's in brackets and it's a negative number and it's going down over time, that suggests you don't know for sure, but it suggests that the business isn't doing that well. Yeah, so hopefully that'll help if your company doesn't have an income statement. 

Okay so, we've seeing how you work out, how much a company, how much profit the company is making. Now the other aim of the session is to see how much directors and shareholders are making. So we start with directors. So directors management of a company, are paid for their work at the company. And they're paid salary, pension, bonuses effectively. Where you find these, is in the notes to the accounts. Again, the notes to the accounts show you lots of vital information in them. So they won't usually be linked to directly from those first statements. So it's often a case of scrolling through, they're often about note five or six. So note one will be really long note that tells you that how the accumulator of the accounting concepts and principles they're using. So we're just going to skim through these notes out we're coming in here to get what we want, right? 

We're not trying to understand every page, we're trying to get what we need to get. So here is this, it's note four, it's director's remuneration. Remuneration is just jargon for how much they're paid, how much they're making, sometimes called emoluments. It's just jargon. Just remember the words and that's how much they're making. So you'll see, it tells you total director's remuneration excluding pension costs in 2017. So again, we checked the year, we check the multipliers it's million, so the total director's remuneration is 4.7 million. You can see it's gone up, maybe an interesting point there, company's profitability decreased but the pay to management has gone up, has increased. And they were also given normally 0.5 million in shares, 1.6 million in shares the year before. Now you need to check at the front of the accounts how many directors are included in this. But what they'll also give you, is how much the highest paid directors, how much the highest paid director. So probably the top boss, how much they were paid. So there you'll see, they will pay 2.2 million. 

Now it doesn't name them, so you have to be slightly careful with how you use it, you don't know for sure that that is the top director but you know the highest paid director made 2.2 million. And again, that's gone up the year before. You'd have to look, it might've been that the old one was sacked, so you need to look into that, but yeah, 2.2 million to the highest by director. And this is something that, if the company has given you an income statement, it will also, it should also be giving you this. They will usually also give you information about, how much directors together were paid, and then how much the individual highest director was paid. And that's in the notes in this case, note four of the accounts. And yeah, look for the word remuneration or emoluments. 

And then I mentioned you get the multiplier right? And yeah, just note the difference between payments to all the directors together, and then the single highest paid one. In a PLC, so public company on the stock market that's giving you an annual report. They'll often disclose this in a separate remuneration report, which might be before the accounts. So again, if you're looking at Tesco or it can be like that you can use control find on your on your computer or in your phone. Again, look for the word remuneration. There is remuneration and yeah you might not get it in the notes to the accounts, you might get it in a separate remuneration report that comes before the accounts, but they'll have the same information there. And they'll often break it down a bit more, giving you details of bonuses or pensions with a bit more detail. So yeah, that will also be there. 

Now the other thing we're going to look at is how much shareholders are getting. So we've obviously done how to find directors, the people that manage the company, how to find shareholders the people that own the company shares effectively own the company. Now they're not paid remuneration, they're paid dividends. So directors are paid remuneration for that work. Shareholders are paid what are called dividends, that they receive from the company's profits. So the dividends, holding a share gives you the right to receive dividends from the company's profits. And again, these are in the, I should just while we're going through another useful notes, is you can see how many people in total the company employees, and how much in total they were paid. So you can see the total weights there. 

So as well as directors pay, you also get everyone's pay. Back to dividends, they'll be given to you in another note. Scroll down. There you go. So note 17 in this case, often it's not 10 but for Asda they do note 17. You got another note dividends proposed and paid. So as long as you know you're looking for the word dividends it's relatively easy to find. The dividends proposed and paid. It tells you how much they're paid. So they paid two separate dividends on the 10th of January dividend of 100 million pounds. 100 million pounds was proposed and paid to Asda Group Limited. Now that's the immediate parent undertaken. The what you've done before and ownership, was the shareholder of Asda Stores Limited, is another company Asda Group Limited. So you're going to have to keep going up that chain to get to kind of quote unquote real shareholders. And then in February they paid another dividend of 300 million pounds. So in total, in February 17 they paid dividends of 400 million pounds, 400 million. And it tells you, see note 18. So if you want to just check that, you can see that the dividend paid just to confirm that 400 million. So yeah, that's just in a note you can get it straight from the note. Then the individual shareholders, will receive a proportion of that corresponding to the proportion of shares they own. So if you own 50% of Asda, then you'd make 200 million in dividends in 2017. So you can work out how much individual shareholders are making according to that proportion. So we've done our three aims now. So if we just go back to our original presentation, we can do a quick recap of what we've seen. 

So we started off looking at the income statement. So that's telling us how much profit the company is making, it tells us how much it's sold, how much it's spent to do that and what's leftover, the profit or the loss. Then we had a quick look at the balance sheet. The balance sheet shows us the assets and if the company owns and also anything is owed. So for example, if the company has made a loan, it's made a lorn, that loan would appear as an asset to it, it's something that it is owed. And then liabilities, anything the company owes. So we saw loans or invoices or wages or tax. And then equity to what the company's worth. And for now we're not getting too, not getting to into the balance sheet, but we're using that when we don't have the income statement. We're using that for a smaller company. Who don't have the income statement at this stage. And then there's a checklist, right? 

When you're reading them, so always chat the currency, the multiplier, the million thousands or just pounds. Brackets gives you negative number, the notes, and then look at previous years to get an overall picture. It's going to be especially important now we're making this in May 2021 with pandemic till companies, lots of companies figures are going to be very different from how they have been in previous years. So it will be very important to to compare them with previous years, get a sense of how they've been doing over like a five-year time period, something like that. 

And then if you want context on the results, compare them with competitors. So find a companies in a similar industry and compare them to see how the numbers kind of stack up, see how those profit Asda made a 300 million pound profit from 22, sorry, yeah 300 million pound profit from 22 billion in revenues. How does that stack up to Tesco? Is it making a similar, a similar kind of profit. And then how'd you make money from a company? So shareholders are paid dividends, and we've seen you'll find those in the notes, and then directs are paid salaries, pensions and bonuses, and the jargon for that remuneration or emoluments. Not, I'm just going to finish, I know it's been going on about 25 minutes, but I'm just going to do something that Nicole asked me to fit on at the end. 

So we talked about shareholders there. I think you've done shareholders, finding the shareholders and companies house, just going to finish with a final thing on finding shareholders for PLCs, so for companies on the stock market. So if you're looking at dividends, who the dividends are going to, and you're looking at a company like Tesco PLC, you can't find those shareholders on company's house, so you have to do it another way that they're not required to disclose to companies house, just the easiest way to do it is, just Google Tesco FT markets. 

So that's financial times market, Tesco FT markets. See this comes up there. And so just click on that FT markets, and the name of the company, and then this is the Financial Times market page. And you see here, you got tabs, tabs in the middle profile. And if you just scroll down, it gives you the top institutional shareholders so that there. So that gives you the top 10 institutional shareholders. However, that won't give you individuals that own shares, and any investors aren't institutions. So take that and cross reference it with the annual report. 

So if you can get the company's report somewhere on there, there should be a disclosure of the top shareholders. So make sure you cross-reference in this with the annual report, the annual report usually tell you the top three or four shareholders something like that. So a company like Sports Direct for example, Frasers Group that owns it, Mike Ashley, an individual, he owns a majority of the company. He wouldn't show up on this list but he does show up in the annual report. So use this name of the company FT markets, and cross-reference that with the annual report. And that should give you the top holders both the top investment funds that are the company, and the top individuals. And there will be a link under this video that shows you that as well, that has more details on that. 

So hope this has been useful and hope it makes sense when you apply it to your own company as they check out the links, and of course you can get in touch if you have any particular queries, and watch out for the longer sessions, the longer training sessions in person or live training sessions. We should hopefully start running again at some point on companies, own company accounts. Alright cheers, good luck with the rest of the course.