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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Principle 2.Time value of money



The best money advice anyone can ever give you is the “time value of money” concept . It is a vital concept in finance. Every financial decision involves the application of this concept directly or indirectly.The calculation of time value involves simple mathematics and it’s easy to calculate. Since this topic is a very important to everyone, we put it down as principle number two.

ENTER-TIME VALUE OF MONEY

The principle is – Rs 100 today is more valuable than Rs 100 a year from now. The reasons for this is quite simple to understand -

  • First, since the cost of living goes up , your money will  buy less goods and services in the future .So, today, money has more value or the purchasing power of your money is more
  • Second, if you have that money today, you can invest and earn returns.When you receive the money at a future date instead of receiving it today, you lose the interest or profit you would have made, had this money been with you now
  • Third, you prefer to have money today since the future is uncertain.

EXAMPLE :

Lets’s assume that you are  25 years old. You have Rs.2500 with you now. You  can either put it in bank FD or buy yourself a new dress. Now, let me further assume that you opt for buying new dress.The reality is that you are spending far more than that Rs 2500. How? Let’s try to calculate the real cost of not investing that money.

FV = pmt (1+i)n

FV = Future Value
Pmt = Payment
I = Rate of return you expect to earn
N = Number of years


HOW TO SOLVE THE EQUATION?

N = Number of years invested - The money you’ve spend on a dress is lost forever. That means,  that  Rs 2500 could have compounded in the bank for atleast 35 years.  How did i get that ’35′ figure? I assumed that you’ll retire at 60 and since you are 25 now, there’s 35  years left. let’s substitute 35 for “n” in the equation.

I= Rate of return expected – The ‘I’ in the formula stands for the expected rate of return. Since  bank fixed deposits would pay around 8% and   stock markets have returned an average of 15 %- 17% ,  Let’s assume you would earn some where in between – an average of 10% rate of return. So, we’ll assume  ’I’ as 10% .

PMT –  is the value of the single amount you want to invest (in this case Rs 2500).

Now substituting the figures, our   formula would be –  FV = 2500 (1+.10)35.

Enter 1.10 into your calculator (this is the sum of 1+.10). Raise this to the 35th power. The result is 28.1024. Multiply the 28.1024 by the pmt of Rs 2500. The result (Rs 70,256 ) is the true cost of spending the Rs 2500 today (if you adjusted the Rs 70256  for inflation of 6 % , it would probably work out to about Rs 9150  That means your real purchasing power would increase approximately 4 fold).

Now,  after realizing the actual cost of spending Rs 2500,   would you prefer to buy a dress for Rs 2500 today or Rs 9150 in the future. The answer is entirely personal.

Once you understand this vital concept,  you would realize that all those bits and pieces of money you spend unnecessarily are costing you thousands in future wealth. This is why time value of money is considered as the central concept in finance.

MORE EXAMPLES..

Future value of money –compounded annually.
You deposit Rs 50,000 for 5 years at 5% interest rate compounded annually. What is the future vale?

  • FV= PV ( 1 + i ) N
  • FV= Rs. 50,000  ( 1+ .05 ) 5
  • FV= Rs. 50,000  (1.2762815)
  • FV= Rs. 63,815.

Future Value of money – Compounded Monthly
You deposit Rs 50,000 for 5 years at 5% interest rate compounded monthly. What is the future value?

(i equals .05 divided by 12, because there are 12 months per year. So 0.05/12=.004166, so i=.004166)

  • FV= PV ( 1 + i ) N
  • FV= Rs. 50,000 ( 1+ .004166 ) 60
  • FV= Rs. 50,000 (1.283307)
  • FV= Rs. 64,165.

GOING BACKWARDS.

Present Value of money – Compounded Annually
You will receive Rs 50,000 5 years from now.  How much money should you get now instead of Rs 50,000 5 years later if the interest rate is 6%?

  • (i=.06)
  • Rs.50,000 = PV ( 1 + .06) 5
  • Rs.50,000 = PV (1.338)
  • Rs.50,000 / 1.338 = PV
  • Rs. 37,370.

Present Value of money – Compounded Monthly

You will receive Rs 50,000 5 years from now.  How much money should you get now instead of Rs 50,000 5 years later if the interest rate is 6% calculated on monthly compounding basis?

  • Here , (i equals .06 divided by 12, because there are 12 months per year so 0.06/12=.005 so i=.005)
  • FV= PV ( 1 + i ) N
  • Rs.50,000 = PV ( 1 + .005) 60
  • Rs.50,000 = PV (1.348)
  • Rs.50,000 / 1.348= PV
  • Rs. 37,091.

KNOW IT

  • A rupee received today is greater than a rupee received tomorrow because money has ‘time value’
  • The time value of money is the compensation for postponement of consumption of money. It is the aggregate of inflation rate, the real rate of return on risk free investment and the risk premium.
  • ‘Time value of money’ can be different for different people because each has a different desired compensation for postponing the consumption of money.

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Principle 1.Finding money !

That’s interesting! This is one topic everyone will read very carefully because it all about finding money! Imagine that you found Rs 1000 between the pages of an old book on the shelf. You kept it some months back and forgot about it. How does it feel? Even if that money was never found, you would have still lived with what’s left in your wallet without even bothering where it disappeared. isn’t it?

This is the principle behind accumulating savings from your income. Set aside your target savings and forget about it as if it were not there and live with the rest. It’s not easy as you think,but definitely not impossible. And , it’s never too late to apply this principle !

To most of us Savings = Income (or salary)- Expenses . However, this formula doesn’t work ( as you would have already experienced :) ) since when money is in your pocket, you get trapped by advertising tricks like discount offers on Clothes or new gadgets which tempts you to spend more. It’s difficult to control expenses. As a result, your savings never hits the target. If what we said holds true for you and you seriously want to save a fixed 10% or 20% of your take home salary each month, you need a different approach to savings. We suggest Robert Kiyosaki’s method from his famous book ‘Rich Dad Poor Dad’.

What kiyosaki said is very simple. Instead of trying to limit your expenses every month, first deduct an amount which you intend to save and keep it in a separate account so that you live with only what’s left. So our formula has to be modified like this :

INCOME – SAVINGS(INVESTING FUND) = EXPENSES

Smart ! isnt’ it ? This formula forces you to “pay yourself first,” before the other expenses. That way you know your savings will not get lost in the daily grind of living expenses.

The other side of this formula is a forced discipline. You hold your expenses to no more than 90% of your take home pay.

You can even automate the process by having 10% (or any amount you want) deducted from your Salary account and transfer it into a separate account or fixed deposit, recurring deposit or other savings instrument .

So that’s the basic trick to find money!

But, that’s not all. You can also find money from many other sources. For example, Instead of going for parties and shopping, you can set aside extra payments like bonuses, commissions and so forth into your savings Fund.

So try to make it a habit to set aside 10% ( or what ever percentage you would like to set aside) and live with rest. If you do that, you have a great chance to succeed.

MORE TIPS TO CONTROL YOUR EXPENSES:

    SPEND LESS

    This is one simple method to save more. Sit back and analyse your spending habits and look where you spend more unnecessarily. Once you have identified certain areas of high spending, try to find ways to cut back. Take a decision that you’ll not spend more than a fixed budget.

    MAKE A BUDGET

    A budget is a very important tool to control expenses. Be it individuals or corporates. A budget is nothing but a chart or a statement that shows how much you earn and hence, how much you can spend.

    PAY OFF YOUR LOANS

    Loans carry high rates of interest. If you have a lot of EMI’s to pay, it naturally reduces your capacity to save more. It also shows that you’re living on high levels of debt which is not a right thing to do. If you have loans, first look for ways to pre-pay it as soon as possible. Another common area where you could lose a lot of money is credit cards. Credit cards companies slap huge interest for delayed payments.

    TRY TO AVOID LATE PAYMENTS

    Any bills – like electricity or telephone or internet or credit card has a deadline within which you are supposed to pay the dues. Unnecessarily delaying such payments results in payment of fines. Such expenditures can be avoided if you can get organized on your bill payments. Make a list of monthly payments and the deadline within which you are supposed to pay. These days banks also allow their customers to automate or link their periodic bills to their savings account or credit card.

    Credit cards over dues need particular mention here. Credit card companies slap huge interest and fines for delayed payments.

    THINK BEFORE YOU BUY

    Do not buy anything on impulse. Before laying your hands on any fancy thing which is up for sale, think if it’s really needed.

    SHOP SMART

    Most of the big brands will be available at throw away prices once there’s an off season sale or sales promotion drive. For example if you want to buy an expensive watch, wait for the company to announce some discount offers. All the big brands announce discount offers at least twice a year.

    KEEP DISTANCE FROM LAVISH FRIENDS

    High spending lavish friends are may hinder your route to save money. It’s natural for you to get tempted by such friends to buy new gadgets every year. They may be nice guys and may not harm you in anyway, but to keep up with them , it may become necessary for you to spend high ( for example latest electronic items or cars , parties, expensive dresss etc ) which other wise ay not be required !

    SAVING ENOUGH IS HALF THE JOB DONE

    If you have saved enough,good. but saving is only half the job done.You have to give your savings the right opportunity to grow. Putting all your funds in fixed deposits or fixed income bonds is not a good idea. Your investments should have the right mix of equities, bonds, gold and fixed deposits.Deciding the ‘right mix’ of investments is something an investment expert can do. It depends on an individual’s age and risk profile.


    KNOW IT

    • Finding money is a matter of making it a priority.
    • Pay yourself first and learn to live off with what is left. You will always have money with you. It may be difficult at first. But gradually, you will see your fund growing and that would encourage you to stick to it until you reach your goal of finding enough money.
    • Bonuses and extra pays you get are opportunities to buy the latest iphone or Blackberry but a prudent option would be to create a savings out of it
    • You can save a lot of money if you control your expenses.
    • As time goes by, your small saving will also give you additional money in the form of interest. Finally, you’ll find that you’ve done a great job,creating more money than expected.

    Take our word. It’s fool proof !!

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    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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