A Bonus Newsletter on What and How to analyze in an Annual Report?
Sharing my thoughts on how i read and analyse the annual report of any company.
Hello Folks! This is a Bonus Newsletter as we are into the festive season so thought of sharing some fundamentals tricks with you all.
While doing fundamental analysis of any company there are a few things which we consider while researching about it -
ANNUAL REPORTS
CONFERENCE CALL REPORTS (Concall Report)
BROKER’s RESEARCH REPORTS
CORPORATE PRESENTATIONS
INVESTORS PRESENTATIONS
In this newsletter, we will learn what are the key points one should look for in the Annual report. How to decode them? How to analyze them? What is their significance?
Lets Start!
What is an Annual report?
Listed Companies publish a report disclosing their annual performance to their shareholders. They share key highlights in it which give shareholders an idea about the company, its management, its product or services, and its financials. All these reports can be found on the exchange’s official site and the company’s official site as well. Its the primary source of information for an investor.
While analyzing an annual report always take at least the past 2 to 3 years’ reports into consideration to understand the overall performance and growth of the company and its business.
Important elements to analyze and understand in an annual report.
VISION & MISSION STATEMENT
CORPORATE INFORMATION
PRODUCT or SERVICES OVERVIEW
FINANCIAL HIGHLIGHTS of LAST 5 to 10 YEARS
DIRECTOR’s REPORT
MANAGEMENT DISCUSSIONS & ANALYSIS.
REPORT ON CORPORATE GOVERNANCE
INFORMATION ABOUT SHARES OF THE COMPANY
AUDITORS REPORT
FINANCIAL STATEMENT
NOTES TO ACCOUNT
VISION & MISSION STATMENT
In this section companies generally present their values, goals, and future prospects. It’s a general statement that can be like VISION - ‘ To achieve a market cap of 50,000 Crore’. This section gives information about comapny’s overall agenda and how they like to proceed with things and in what manner.
CORPORATE INFORMATION
In this section, the company gives details of directors, bankers, auditors, and registered and corporate offices. One should look here and take a note of is designation of each board member, incase auditors are reputed they provide additional comfort to the company you are investing in.
PRODUCT or SERVICES OVERVIEW
This section tells you about the entire product and service range of the company. It tells you about how many products they have. What different product or service categories do they have? How are they priced? In which countries do they have their products footprints? Future product development? Introduction of new products if any? and so on. One should definitely keep a note of all this information as it comes in handy while comparing it with the company’s peers.
FINANCIAL HIGHLIGHTS
It is financial data of past years mostly 5 to 10 years in which you get an idea about the company’s revenue, earnings before interest, tax, depreciation, and amortization (EBITDA), profit after tax (PAT/Net income/loss) from income (profit and loss) statement and also get a glimpse on shareholders equity, assets, debtors, liability and total debt over the years. One can compare this information to justify how the company is doing financially and does its performance actually reflecting in the balance sheet. Also, this data helps you calculate various financial ratios which helps you fundamentally derive the value of the company and its stock price.
DIRECTOR’s REPORT
It is a highly important section as the DIRECTOR itself gives an explanation of the financial results, key developments in the company. Key things to look at here are operational parameters of the company such as capacity additions, CAPEX plan executed during the year, order book as on financial year-end. Terms used to discuss the operation of the company varies depending on sectors so get some knowledge about industry terms or use a glossary to get better insights. One should read the past 3 to 5 years director report to see whether management has achieved the set revenue target over the years, whether strategies adopted over the years were favorable for the company, and did management was able to perform during the roller coaster ride of an economy. Also, one should look at the tone of the director's report while reading the annual report. Ideally, it should sound positive in good years and negative in bad years of the company performance.
MANAGEMENT DISCUSSION AND ANALYSIS
Another important section to read and understand. This section provides information on trends in the industry, SWOT analysis(a study undertaken by an organization to identify its internal strengths and weaknesses, as well as its external opportunities and threats) of the company, insights on key line items of financial statements, and risk factors/concerns affecting the company performance. One will get relevant information to understand the industry while reading it.
REPORT ON CORPORATE GOVERNANCE
Important section as the name suggests itself. In this section, Company gives insight on corporate governance followed by them, composition of the board of directors, brief background information on directors and independent directors of the company, attendance of directors in board meetings and annual general meetings, remuneration of directors, re-appointment of directors after completing the term, composition of sub-committees, etc. One should look here is a composition of the board of directors, sub-committees, and attendance records of directors during meetings, relate remuneration paid to directors with profits earned by the company. Also, Analyze whether the profile of independent directors matches the requirement of the company as per sector of a company.
INFORMATION ABOUT SHARES OF THE COMPANY
This section gives information about the historical performance of share price, shareholding pattern of the company, pledging of shares by promoters during the year if done, split of shares, bonus shares distributed, and stuff like this. It’s mostly to understand the share activity.
AUDITORS REPORT
An important section is where the auditors themselves give comments on the financials of the company. One should look for who the auditor is and get to know a little about them like the qualification of them and their process to conduct the audit. Auditors should highlight changes in internal accounting policies if any.
FINANCIAL STATEMENT
This is an important section as well where you get to learn about the financial health of the company. It provides detailed information on profit and loss accounts (income statement), balance sheet as on year-end, cash flow statement, and schedules of the financials for coming years.
NOTES TO ACCOUNT
An important section in which you will get information on accounting policy followed by a company, depreciation method, forex losses/gains, segmental reporting, inventories, liabilities, leases, etc. This will help you to get information on any change in accounting year or accounting policy which can inflate revenues or profits of the company, trend in segmental revenues/profitability, contingent liabilities over the years, related party transactions, etc.
That’s it! Yes, it looks like a long and tedious process at first but once you start it you keep a record and track of it after which it becomes easy and fast for you to read and analyze the whole report. It builds your confidence and trust in the company to buy, sell or hold the stock. Reading 2-3 years annual reports is suggested and appreciated as it gives you a better idea overall. Try it! Do let me know how you feel and share your thoughts and ideas in the comments.
See you in the next one!
Adios!