Management Discussion and Analysis (MD&A) is a key part of a public company’s annual or interim reports.
In MD&A, the operating and financial performance of the reporting period are analyzed, and company business outlooks are provided. These messages are not addressed in the financial statements or elsewhere in the report but play a significant role in investors’ decisions on investment.
Set a Tune for MD&A.
Investors expect the MD&A to showcase the core competitive advantages of the company. Before drafting the report, the IRO, heads of major business segments of the company, and executives shall sit together to review and discuss key business and investment highlights of the reporting period. Based on the company’s strategy, they should come to a conclusion that sets the tone for the business development in the reporting period from all aspects, which shall work as the framework of the MD&A.
The Analysis is Key.
The market could only read the results of business operations from the data provided in the report, while the key to a successful MD&A is to provide the explanations behind these data and their changes. A good MD&A serves as an MRI for a health check of a company’s business conditions, providing an in-depth review of the company’s business as a whole. In the MD&A, we expect to read clear and specified explanations of the revenue contribution from each business segment, the ups or downs in costs and profit margin of major products/services, the changes in market share, the financial position and cash positions, etc. Again, the goal of MD&A is to analyze and provide the “whys” for investors.
Metrics and Data.
Key metrics widely accepted by the industry are generally included in the MD&A to evaluate a company’s performance. The metrics exclusive to a company can be noted with clear definitions and calculation formulas. Moreover, companies should compare/analyze data on a Y-o-Y basis and/or with the prior reporting period and showcase the changes in tables and charts, which will help show trends and are reader-friendly for investors and analysts in their access to crucial information.
Consistency.
One vital thing to keep in mind is to ensure consistency in disclosure. A lack of consistency can bring on a lack of interest. Once companies have decided on the metrics to present their operation and financial performances, they should stick to them in future reports. The last thing we want is to selectively stop disclosing some of the metrics due to the non-ideal performance of a specific period. For major projects, companies should also consistently disclose their progress.
Learn from Peers.
We encourage companies to check disclosures by peer companies, especially on the industry’s common issues, such as the macroeconomic situation, recent market turbulence, future industry outlook, and regulatory risks. The peers’ perspectives could be a very valuable reference. Based on industry practices and their conditions, companies shall then decide and convey the most effective information to investors in their MD&A reports.
