Read the Annual Report this way, and you will be an Intelligent Investor
This is the season for most Indian companies to file and publish their Annual Reports.
What are the key sections of an Annual Report, and what do they signify?
Annual Reports can seem daunting with their financial jargon and complex tables and charts.
However, they are a goldmine of information about a company's health, the state of business and the sector that it is operating in.
Company’s Report Card
Have you ever wondered how to assess a company's health? The answer can be found in its Annual Report. This document, which is frequently overlooked by the uninitiated, contains a wealth of information for those who know how to decipher it.
An Annual Report is a yearly communication from a company to its shareholders and other stakeholders. It's usually released at the end of the fiscal year, with data dated March 31st.
The report is usually available on the company's website or as a hard copy upon request.
As the Annual Report is a statutory filing, any misrepresentation of facts can result in legal action.
Let us look at the sections to read in an Annual Report that could make you an intelligent investor.
Chairman’s Statement
This section gives quick insights into the company’s business and its future. In large business groups, this can be an excellent read.
Some of the letters are considered pieces of investor literature, with not just shareholders of the company but the wider investing community looking forward to reading them.
Board of Directors report
A director's report is intended to explain to shareholders the overall financial position of the company, its operation and its scope of business.
Know the people behind a company when you are first looking up a company in an emerging growth sector. Understanding the people behind it may be valuable to boost confidence while investing in emerging growth companies.
Information such as this can also give some comfort on the kind of leadership and experience a company has access to.
Management Discussion and Analysis
This section contains a good amount of data and reasoning behind a company’s performance for the year, what the company plans to do, the industry, and so on.
Based on the depth of the explanations provided in this section, it’s an incredible source of information that helps assess a company’s performance and prospects.
Board’s Report
This statutory report provides information on areas including the number of board meetings, comments on the Auditor’s Report, and financial performance of subsidiary companies.
There are two areas of interest here: Management Remuneration and Related Party Transactions, including details of loans and guarantees given by the company.
Management remuneration is important in the case of family-owned companies, where the board will comprise mainly family members. A check on this section becomes necessary where the promoter stake, as well as dividend payout, are low
Such issues are less likely in larger companies due to shareholder activism, the rise of proxy advisory firms and tighter regulations recently.
Related Party Transactions section vouches for transparency of transactions between group companies.
Related Party Transactions are not bad on their own, as companies with subsidiaries and associates often engage in several such transactions.
But the nature of transactions and the amounts involved matters, and where they are not transparent nor with good reason, will help flag governance issues.
Corporate Governance report
This section explains the company's governance philosophy and the workings of the governance structure, provides some details of the upcoming Annual General Meeting, and gives information about the key management personnel and the board of directors.
Financial Statements
There will be both Standalone and Consolidated statements comprising Balance Sheet, Profit & Loss Account and Cash Flow Statement.
While the Balance Sheet and P&L will give a summary of financial information, detailed information will be available in the Notes to Accounts or Schedules.
Notes that could be important
Notes to Accounts or Schedules is the meat of the financial statements and offers insight into the company’s financials that you will not be able to get from the main P&L or balance sheet.
Some of them are:
- Notes to Investments – Non-Current will detail investments in shares of companies including associates or JVs, or other interest/ return generating long term investments.
- In the case of acquisitions or mergers, companies will give details on the merger accounting as notes to the Schedules.
- Expense break-ups and other details: The notes also provide granular details of operating and other expenses, where the P&L would provide only the broad top-level expense outgo. Similarly, details on aspects such as receivables, loans and advances, and liabilities can be found in the notes. For example, in receivables, you can find a break-up of receivables over 6 months old - if this is persistent, then you need to dig deeper.
Auditors’ Report
Auditors’ opinion on financial statements is expressed in this section. There will be separate audit reports on standalone and consolidated financial statements.
If there are any “qualifications” – i.e., areas of concern regarding the company’s accounts or practices – it should necessarily be looked into.
Notice for the Annual General Meeting (AGM)
Watch out for special resolutions, which require a higher share of shareholder approval. Some of the special resolutions are approval of Related Party Transactions, referring to a probe by the Serious Fraud Investigation Office, and appointment of Managing Director who has attained 70 years of age.
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