Understanding Annual reports.

What is an annual report?

An annual report is a summary of all that’s happened in the business in a financial year – growth in revenues, new contracts, new milestones, changes in management team, new appointments of key personnel’s, future plans etc. It is prepared by the management and  distributed to the shareholders, promoters, government authorities, general public and to anybody who’s interested in the affairs of the company. Most annual reports are in the form of a book. It runs into many pages starting from a chairman’s message to future plans and prospects. An annual report is presented in the annual general meeting.

What is a financial year?A financial year is a period of twelve months or less ending on 31st march in India. It could be any other date-for example, for most of the European countries, financial year ends on 31st December.

What does an annual report contain?

Typically an annual report would kick off with the letter to the shareholders from the Chief Executive Officer. It will also contain a list with contact numbers of all the key board members, auditors, company secretary etc

Then, in the next pages, detailed financial reports like balance sheet, income statement, supporting schedules, a general report on company’s operations, an independent auditor’s report etc are given. It will also contain details regarding the share holding pattern of the company, along with historical share prices – highs and lows, a lot of pictures and graphs, displaying in visual form all the milestones and achievements the company has made.

You will have to read his report with a shrewd mind because, generally, an annual report may amplify the positive aspects of the business and give less attention to the negative aspects. The chairman’s report may indirectly contain apologies for targets missed. The best way to read the annual report is to read it in comparison with the previous one. When you connect the present report with the previous ones you’ll straight away get an idea about what targets have been missed during the year. That way, you’ll also get the first impression about the management’s performance.

It may take some expertise and patience to read and understand an annual report thoroughly. As an investor, it will be very beneficial for you to go through these reports since; it will give you more insights into that company’s operations.

Contents of an annual report:

You should be able to find the following informations from an annual report:

Letter from the CEO

Summary of the operations-milestones, achievements, prospects.

Past Annual summary of all financial figures.

Management discussion and analysis of the performance of the company

The director’s report.

The balance sheet

The income statement

Auditor’s report

Subsidiaries, brands, addresses, registered office, head quarters etc..

Names of directors

Stock price history

Conclusion
Annual reports are a collection of important informations that may be vital for the investor. Our next article would tell you on how best to read them and what to look for.

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Lessons in computing returns – IV Returns from shares.

Hi there,

In the case of shares, there are two types of returns you expect –

  • Dividends
  • Capital appreciation

How would you compute returns in such cases? let’s discuss with two examples.

Example 1

You invest in 1000 shares of AB Ltd for Rs 100,000 a year back.  At the year end, the shares are quoted at Rs 150 and the company also pays you a dividend of Rs 2 per share. That is, you get Rs 2000 as dividend, and at the same time, you investment is now Rs 150,000. You sell the share.

How would you compute your overall return from this investment?

The gain you made is as follows –

  • Appreciation in market price – Rs 50
  • Dividend received – Rs 2
  • Total gain – Rs 52
  • Return = Rs 52 / Rs 100 = 52%

Example 2

You invest in 1000 shares of AB Ltd for Rs 100,000. You hold on to it for 3 years. The dividends paid during these 3 years are follows- Rs 2, Rs 2.50 and Rs 3. The market prices at the end of each year are – Rs 90, Rs 95 and Rs 110.

How would you compute your yearly return from this investment?

  • The cost per share at the point of investment was Rs 100
  • Fist year return would be – fall in market price Rs 10, dividend paid Rs 2
  • Therefore, net loss = Rs 8
  • Return = -8 / 100 * 100 = loss of 8%

Second year

  • The cost of share at the end of first year = Rs 90
  • Year end price = Rs 95 , dividend paid = Rs 2.50
  • Therefore , net gain = Rs 7.50 ( 95-90 + 2.50)
  • Return = 7.50 / 90 * 100 = 8.33%

Third year

  • The cost of share at the end of second year = Rs 95
  • Year end price = Rs 110 , dividend paid = Rs 3
  • Therefore , net gain = Rs 18 ( Rs 110-95 + 3)
  • Return = Rs 18/ 95 * 100 = 18.94%

Overall return from investment would be = (-8%) + 8.33% + 18.94% = 19.27%

So, while computing yearly returns from investment, you should consider capital appreciation or depreciation (although it’s notional) and also the dividends received.

Bye for now,

Have a nice day !!

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Lessons in computing returns – III Compounded returns.

Hi there,

Let’s catch up with compound interest in this article..

BASICS FIRST.

The formula for compound return is as follows:

  • · FV = P ( 1+ r) n
  • Where FV is the future value
  • P is the money invested
  • r is the rate of return
  • n is the number of years for which the amount is deposited.

Situation1.

You invest Rs 50,000 today and it grows to Rs 100,000 in five years. The five-year return is 100 per cent; but what is its annual return?

To calculate this, you need the formula on compound interest. Using Rs 50,000 as principal, Rs 100,000 as future value and five as the number of years, let’s find out the annual rate.

  • FV = P (1+r) n
  • Therefore, r = (FV/P) 1/n – 1
  • Here, the first step is  to calculate 1/n = 1/5 = 0.20
  • Now, r = (50000/ 100000 ) .2 0 -1
  • r = 2 .20 -1
  • 2 .20 = 1.1487
  • 1.1487- 1 = 0.1487
  • Therefore r as a percentage would be (0.1487 * 100 ) = 14.87 %

This 14.87 per cent is the compound return, and is the only relevant return when you analyze an investment.

If you divide the 100 percent by the number of years, you get the answer as 20%.This is the simple return.

The 100 per cent is referred to as holding period return. The holding period return keep on changing with the period of holding.

That brings us to the first moral of computing long term return. compounded returns is the best measure for long term return.

You can also use the rule 72 discussed elsewhere and arrive at the approximate rate of return since in this question, the investment has doubled in 5 years.

Situation 2.

Suppose you want to make an estimate of future rate of return of a stock. One way of doing so, is to look at the past rate of return as an indicator of the future. Here’s how the return is computed in this case.

Consider a stock, A Ltd, whose return during each of the last five years has been 10 per cent, 20 per cent, 15 per cent, minus 30 per cent and 20 per cent per annum. Hence its simple average is 7 per cent per annum. Consider another stock, B Ltd, whose return during the last five years has been 10 per cent, 15 per cent, 20 per cent, 10 per cent and minus 20 per cent. Its simple average return too is 7 per cent per annum. So should we say that they are identical performers? Surprisingly, the answer is ‘No’. Here’s why.

If the stock price of A Ltd began at Rs 100, it would have grown to

  • Rs 110 ( 100 * 110%) in the first year
  • Rs 132 (110 * 120% ) in the second year
  • Rs 151.80 ( 132 * 115% ) in the third year
  • Rs 106.26 (151.80 * 70%) in the forth year (the company grew at -30%)
  • Rs 127.51 (106.26 * 120%) in the final year.

Rs 100 growing to Rs 127.51 is a compounded rate (CARG) of 4.98 per cent using the compound interest rate formula.

Similarly Y Ltd, which began at Rs 100 at the beginning of the first year, would have sequentially grown to Rs 110, Rs 126.5, Rs 151.8, Rs 166.98 and Rs 133.54 at the end of each of the five years. Rs 100 growing to Rs 133.58 is a compounded rate of 5.96 per cent.

See the difference in the compounded rate. Yet the simple average of the growth rate was same.

Clearly, Rs 100 growing to Rs 127.51 is not the same as Rs 100 growing to Rs 133.58. So, compounded annual growth is considered the right measure of return;

The simple average is used for purposes of year on year measurement or short term measurement of returns.

Till my next post …

……. have a nice day !!

2 Comments

Lessons in computing returns – II Simple returns

SIMPLE RETURNS:

Simple returns are used for evaluating short term returns.

BASICS FIRST:

The formula for computing simple returns is

Simple Return = FV  / P  - 1

Where,

  • FV is the amount received on maturity date and
  • P is the amount invested

Example 1

You deposit Rs 10,000 in a bank for a year and gets Rs 11000 in return. The simple return would be –

  • 11,000 / 10,000 – 1 = 0.1 or 10%

Example 2

You purchased 200 shares of ABC Company at 50 per share. You paid Rs 300 as commission to your broker. On a later date, you sell the stock for Rs 75 and pay a commission of Rs 450 to the broker. What is the simple return on investment?

Total cost of the share = number of shares x rate + commission paid = Rs 10,300

Sale proceeds = number of shares x rate – commission paid =Rs  14550

So, the simple return will be as follows:

  • 14550 / 10300 -1
  • 1.41 – 1 = .41 or 41%

Example 3

You purchased 200 shares of DEF Company at 50 per share. You paid Rs 300 as commission to your broker. On a later date the company declares dividend of Rs 2 per share. You sell the stock for Rs 75 and pay a commission of Rs 450 to the broker. What is the simple return on investment?

The simple return will be as follows:

Total cost = 10,300

Total returns = 14,550 + 400 = 14, 950

Simple returns would be

  • 14950 / 10,300 – 1
  • 1.45 – 1 = 0.45 or 45%

That’s about simple returns. Remember, simple returns are useful only for short term investments.

Till my next post…

….. Have a nice day !!

2 Comments