Annual Report – Smart way to decode company financial health

Investors while making any new investment in any company review the company annual report in order to get a wholesome knowledge of the organisation.

Thus, annual report gives the overall view about the company’s activities that took place for the preceding year. It communicates to investor’s the company’s primary message as well as provides most pertinent information to them regarding future plans.

It gives the information about the strengths and weaknesses of the company’s in terms of both quantitative as well as qualitative aspect.

Importance of Company Annual Report

Annual report is a financial communication of the company in order to attract and retain its investors. With the help of annual report investors gets updated on the financial performance as well as new developments in the company.

By reviewing the financial data in the report, investors find the evidence of a sound management and the business model and structure. Investors get an idea about the company’s growth opportunities as well as product plans which helps them to make investment decisions.

Where can you find the Annual Report?

You can find the company Annual Report on the company’s website under the head investor relation. Even in the stock exchange website i.e. (www.bseindia.com) and financial website (www.moneycontrol.com) annual reports of the companies are available.

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Points That Investor’s Should Inspect In An Annual Report

Annual report contains many sections that provide useful information about the company. While going through the annual report investor needs to be very careful since there are many minute details present in the annual report that needs to be scrutinized. Major sections are:

1. First section of the company annual report provides the director’s report which includes the information about the key developments in the company. Information on the strategies that the company has adopted and also about the business performances. Thus this section gives a snapshot of the company’s overall outlook or the first impression.
2. Annual report contains the historical financial highlights providing view about the company’s historic financials. This section represents information in the form of graphs or tables and does multi-year operating and business metric comparison. Thus this helps the investors to find out the overall performance of the company over the years and analyze their financial performance during good and bad times.
3. Management Discussion & Analysis section in the company annual report is an important section. It provides the general information about the management view on the industry and business prospects going ahead and during the past. Investors can find qualitative and quantitative aspect of the company in this section. Details about the company’s future growth prospect as well as its overall economic activities are also found in this section. Thus as it’s a detailed section thus it helps investors in taking an investment decision.
4. Investors should have the knowledge about the corporate governance that is followed by the company and also the composition of board of directors. The profile of directors should match the requirement of the company. Thus investors should examine and check for any corporate governance lapses in past or present in the company and how has the company mended it.
5. Historical performance of the share price should be analyzed and the shareholding pattern of the company should be known. Any changes in shareholding of promoters can be a negative or a positive for the company as the case may be. Historical share price movement can give the investors an idea on what kind of CAGR returns can be generated from the company’s share.
6. Auditors report is also mentioned in the company annual report where auditors provide the comments on the financials and corporate governance of the company. Any negative comment by them will be taken as a red flag for the company. One should also note if any resignation of senior members or auditors are often or not in a company as they also raise a negative outlook for the company.
7. Annual report contains financial statement both consolidated and standalone that provides the information about the profit and loss account, cash flow statement and the Balance Sheet of the company. The statements should be carefully studied before making any investment decisions.
8. Annual report also contains notes to accounts which give the breakup of the financial transactions done during the entire year. These notes should be compared to previous years to find out any manipulations or transfer to subsidiaries or sister concerns. Any transaction between the related parties should be carefully monitored and their implications understood.

Can Faults of the Company come to Light through the Annual Report?

Company Annual report provides large amount of information for e.g. (Director’s report, MD&A, financial statements, auditor’s report etc.).

Reading the annual reports for last 5-10 years of the company helps the investors to decode the past history of the company. It gives insights on management integrity and commitment, corporate governance, growth plans, product portfolio, capex plan, auditors’ qualification if any, related party transactions.

Suggested Read – Why We Should Read Annual Reports?

Hence, analysing past 10 years annual report help investors to find faults if any (e.g. over commitment and under deliver through improper execution).

Advantages and Disadvantages of Annual Report

Advantages

• Annual report helps investors to make investment decisions.
• It contains the key information about the company’s financial position that helps the investors to take decisions on the company.
• Annual report gives the picture about the company’s future prospect and about its future investment plans.

If annual report has advantages it even has some disadvantages as well. Disadvantages are:

• Annual report is the general report which is aimed for general public. So, it will be of interest to some reader’s only.
• Analysing company annual report is not everyones cup of tea.
• Annual Report can be dressed up thus one needs to compare it with earlier years to find the manipulations if any.

Despite of its disadvantages annual report is a very important document for all investors for their investment decision.

Key Takeaways

• Company annual report is a document that is disseminated to shareholder’s that provides information about the company’s financial health as well as previous year’s company’s operations.
• Annual report contains Profit & Loss statement, Balance sheet and Cash flow statement of the company.
• In order to find the qualitative aspect of the company annual report is a good source.
• Every section in the company annual report highlights certain aspect of the business.

Happy Learning!