How to read an Annual report.

An annual report, as mentioned in the last article, contains a wealth of information on any event that has a material impact on the company. We also said that you will have to read it carefully in order to dig out those negative remarks since; it will be generally written in a positive tone. The ‘positive tone’ in which it is presented is not meant to deceive the shareholders or the general public in any way. But, that’s the way it is presented – amplifying the positive facts and muting the negative aspects. This piece of advice should be there in the back of your mind while going through annual reports. The form, layout, pictures, graphs and color of the annual report are of less importance. What’s to be collected is the content – those figures, ratios, notes and other bits and pieces of information that you’ll be able to gather. If you know how to put everything together and fish out meaningful information, you’re bang on target.

Must reads in an annual report.

You do not have to read the report cover to cover. That’s not practical also. The first few pages are colorful and it presents a non technical overview of the company’s objective and how well it is meeting them.

The front section will probably also tell you about the company’s strategies, products and competitive positioning. The chairman’s statement or message to shareholders will also be included here.

The back portion of the annual report is usually filled with financial information about the company. The real meat of an annual report is in the financial statements and ‘notes to accounts’ found in this portion.

The balance sheet, income statements along with auditor’s comments and notes to accounts are must reads. Apart from these, the Director’s address gives an overview of your company’s operational and segment-wise performance, key initiatives undertaken during the year, achievements and a financial snapshot.

The Director’s report will give an overview of the initiatives taken during the year, other achievements, awards and a snapshot of whatever milestones the company could achieve in the past one year.

Many items of expenditure or income may be disclosed in the financial statements in abstract figures for which break up will be given in the schedules. There will be a long list of schedules accompanying the balance sheet and income statements.

The management will also discuss in detail about the industry, factors affecting the company’s prospects, impact of policy changes by the management or the government, strengths, opportunities, threats, competitors and how well the company tackles all this.

Other bits and pieces.

A detailed study of the notes to financial statements, allow you to go beyond the numbers to understand some of the assumptions and accounting policies that underlie them. For this purpose, we must refer to the notes to accounts, given as an appendix to the balance-sheet and profit and loss account.

Remuneration given to directors and other managerial personnel, dealing with sister concerns of the company etc may also find place in the notes to accounts.

Notes can be divided into two parts. The first part describes the basis of accounting and presentation. It briefs you on estimates used and where foreign exchange earnings are involved, the basis of conversion. Some of the key points of information contained in the notes include the position of cash and cash equivalents, collateral given to various lending institutions and investments in sister concerns.

The second part provides information on the assets and liabilities position. Here, related party transactions   that show company’s dealings with group companies and associates, are key sources of information.

For manufacturing concerns, the production figures assume significance. The production figures compared with installed capacity could give you an idea of the efficiency at which the company is operating .This information is particularly pertinent if the company is planning further expansion

For newly listed companies, the utilization of the IPO proceeds are disclosed in the annual report.

Since financial statements are prepared by “matching principle” an analysis of the cash flow statement will show the actual flow of cash.
So, next time you get an annual report, look beyond numbers. The financials are just one part of it. To get the bigger picture, consider reading and analyzing the above mentioned points.

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13 Responses to “How to read an Annual report.”

Souvik Basu

May 29, 2012 at 10:35 pm

Hi Victor,
Your articles are very helpful. Succinct yet lucid and to-the point.

I have a query which I believe you might be able to answer. Its a bit long, so I hope you will be kind and patient enough to bear with me.

As a newbie investor interested to tread into stock market, what I do not understand is how to research the stocks? There are hundreds of companies in scores of sectors. If one has to go in for detail research for each company one wants to invest in, that would be time taking. It is not possible for someone like me, who has a full-time job in the IT field. So where do I start? How do I go about it? Is there any place (website/news channel etc) that is a good place to access information on which I can base my decisions?

Thanks…

J Victor

May 30, 2012 at 9:14 am

Dear Souvik Basu

Researching stocks while doing a full time job would be a difficult task, especially for someone from the IT sector. It would be much easier to guide someone from finance stream.

There are websites which offer raw data. For example http://www.moneycontrol.com would give you financial information of a company for the past 5 years.

OR check out reuters at http://www.stockscreener.in.reuters.com/Stock/IN/Index?quickscreen=gaarp“which has a stock screener which selects stocks according to certain parameters set by you.

OR there are providers like kensource which offer financial information of all the 6000+ companies listed in the stock exchange for a fee. So, raw data is available from a lot of sources. Converting that into helpful information takes time and effort.

Suggested steps for you:

1. Basic knowledge about financial statements and data contained therein is a must. The relationship between these datas are analysed with the help of financial ratios. knowledge in ratios are also very fundamental.

2. Try to pick up two or three parameters like P/E , revenues growth and consistency in profits. Study the various aspects – We do not need all the fundamental and technical parameters to pick stocks. Being an expert in 3 or 4 basic tools would be the right thing to do.

3. Try to apply it to the first 50 stocks (Nifty 50) See if you can spot some low priced stocks. Write it down. wait for some time and check if your decisions were right.

4. Keep tracking news about the company you are following.

kick off your research. At the same time, If you would like to grow with the market from now on, try Sensex and Nifty ETFs. That’s the best bet for you. These are funds which invests your money exactly in the same ratio as the index they follow. So when the index grows, you funds also grow approximately in the same percentage. 10 or 20 years from now, may be our indices would be in 35000 0r 50,000 levels !!

I am suggesting some excellent index funds:

1. Franklin India index fund – nifty growth
2. Tata index fund – nifty option A
3. Nifty benchmark exchange traded funds- nifty BEES
4. Quantam index – growth

hope you’ve got some idea !

Souvik Basu

June 1, 2012 at 11:00 am

Hi Victor,
Thank you for your help. I do visit moneycontrol.com, but mostly for researching mutual funds.
I am not sure if you have come across a weekly paper from ET called ET Wealth. Every issue has a list of 100 top funds for the week. Do you think its a good idea to keep track of the stocks that feature consistently in this list, and then invest in them (as they are consistent performers, according to the ET group)?

Souvik Basu

June 1, 2012 at 11:03 am

Correction (to the post above):
*Every issue has a list of 100 top STOCKS (not funds…sorry) for the week.

J Victor

June 1, 2012 at 11:56 am

Dear souvik..

I haven’t come across ET wealth. I will check ET wealth and then give my opinion on how you can use that information.

Cheers.

Souvik Basu

June 4, 2012 at 8:33 pm

Thanks Victor…do let me know your opinion in case you manage to get hold a copy of that paper. It is a weekly that is published every Monday.

J Victor

June 5, 2012 at 8:21 am

Oh it’s on Monday. ok:) i went to stalls on Saturday itself but couldn’t find one.
Thanks :)

Souvik Basu

June 10, 2012 at 9:04 pm

No worries….whenever you can afford some time. I’m not in any hurry. I don’t see myself getting into stocks before 2-3 months. Currently, learning all the nuances of trading (in which, your articles are being of immense help).
:)

I currently have all my investments in MF or FD/RD. Every month, this is where it goes
i) 6000 in a recurring deposit earning me 10% p.a.
ii) 2000 in Franklin India Taxshield (ELSS)
iii) 1000 in ICICI Pru Focussed Bluechip Equity
iv) 1000 in UTI Opportunities Fund
v) 1000 in Tata Dividend Yield Fund
vi) 1000 in HDFC Mid-cap Opportunities
vii) 1000 in SBI Gold Fund

Do you think this is a good plan? If possible, kindly let me know.
Thanks once again for all your time and help :)

J Victor

June 11, 2012 at 7:18 am

Thanks for writing:)

Your MF selections are good. At this point HDFC mid cap , Tata and UTI are at buy levels.since you’ve opted thru SIP, No worries at all for the long run.

Souvik Basu

June 11, 2012 at 10:05 am

Thanks Victor…for your opinion
:)

ASAI

January 29, 2013 at 3:31 pm

Dear Victor,
Your endeavour and spirit in having SHAREMARKETSCHOOL has indeed equipped a novice like me tremendously beyond words.
You’re are one of a kind; unique.
Thank you so much.
Warm regards:)

prabha

February 4, 2014 at 5:16 pm

while looking at the annual report is stand alone data should be considered or consolidated??

Amit Gupta

October 31, 2015 at 1:51 am

In last three four years, I have never read something with so much consistency but every night I read your site with lot of interest. Hats off to you for this immensely helpful and interesting tutorial.

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