How to read Annual Report of a Company

How to read annual report of a company arvind151
How to read annual report of a company arvind151

A company’s annual report is one of the most important ways to convey itself to its investors. An Annual report basically serves as a mirror of company’s performance and their vision. It also serves as a primary source of getting information about company for all the investors and the shareholders.

Annual Report is basically published once in a year by the company to give all the investors an opportunity to decipher the condition and performance of the company.

Annual report is mostly published at the end of every Financial year which is dated as 31st March of every year because in India, Financial year ends on 31st March.

Every Annual report is prepared without any intent to deceive or reflect dishonesty about the business however investors should always read them with a sense of scepticism even though each and everything mentioned in Annual report is an official fact.

If an investor finds anything wrong or suspicious in an annual report, he has full right to question the company.

Question: Where to find Annual Report?

Answer: According to SEBI regulations, every public company which trades on stock exchange needs to have a website so as to showcase all its financial reports to the investors on their website in an act of maintaining transparency.

Therefore, you can find Annual reports on every company’s website. However, in India, there are many platforms which also provide Annual Report of the companies.

However, it’s advisable to all investors to make their best efforts to get the annual report directly from company’s website as media and other sources sometimes can be unreliable which can lead to misunderstanding or misinterpretation of data.

The two halves of an annual report :

When you check out an annual report, keep in mind that there are basically two parts:

  1. the shiny sparkling part up front, where you have plenty of graphs like pie or chart which are used to carefully illustrate financial figures, some high quality photography of company’s assets and other impressive soundbites.
  2. the second half is the-facts-Ma’m part, consisting of all the financial statements of the company and conversation of recent results from the management. The second half is more important which usually has more useful information however as investor, it’s worth to check out both the parts of annual report.

Let’s see what the content of an Annual Report looks like.

Below is the snapshot of Contents of an Annual Report of Infosys:          
Annual Report arvind151Important points to focus while reading an Annual Report :

 1) Mission statement of the company:  A mission statement of the company is very generic in nature and portrays what the company wants to achieve in future. It basically summarises the mission, vision and Goal of the company.

For example – A mission statement of a company can be ” We will be a global leader in Information Technology” or ” We will achieve annual revenue of 10,000 Crore in 2 Years”.

2) Letter addressed to shareholders: In this section you will get a letter more often than not written by a CEO or MD of the company which is addressed to all the investors and stakeholders of that company.

Below is a snapshot of the letter written by Dr. Vishal Sikka, CEO of Infosys to all the investors and shareholders of the company.How to read Annual Report of a company

3) Financial Highlights : Financial highlights is just a small chunk of the financial report and it basically gives a quick overview of what financials of the company looks like.

In this you will get to analyse trend of Revenue, earnings before interest, tax, depreciation and amortization (EBITDA), profit after tax (PAT/Net income / loss) from income (profit and loss) statement and also get a glimpse on shareholders’ equity, assets, debtors, liability and total debt from balance sheet over the years.  Important ratios are also presented in charts over 5 to 7 years’ time line.

Here is the snapshot of Financial highlights given in annual report of Infosys:How to read Annual Report of a Company arvind151How to read Annual Report of a Company arvind151

We will learn more about the Financial statements and how to individually analyse them in next chapters.

4) Corporate Information : In this section you will get to know about all the members of the board, directors, bankers and details of registered office.

5) Director’s Report : This section provides brief summary on financials, explanation of the financial results, key developments in the company. Key things to look in here are operational parameters of the company such as capacity additions, Capital Expenditure (CAPEX) plan / executed during the year, order book as on financial year end, average length of stay, occupancy rates, average revenue per occupied bed, average revenue per user, etc. Terms used to discuss operation of the company varies depending on sectors so get some knowledge about industry terms or use glossary to get better insights. Read the past 3 to 5 years’ director report to see whether management has achieved the set revenue target over the years, whether strategies adopted over the years were favourable for company and did management able to perform during roller coaster ride of an economy. Also, look at the tone of the director report while reading annual report. Ideally, it sounds positive in good years and negative in bad years of the company’s performance.

6) Management discussion and analysis (MDA) : This section can be very important as it can give you  an idea of what management of the company expect from their business. It provides information on trends in the industry, SWOT analysis (SWOT analysis is a process that identifies the Strengths, Weaknesses, Opportunities and Threats of an organization) of the company, insights on key line items of financial statements and risk factors/concerns affecting the company performance. You will get important information to understand the business and industry in general while reading this section.

7) Corporate Governance Report : This section gives an insight on corporate governance followed by a company, composition of board of directors, brief background information on directors and independent directors of the company, attendance of directors in board meetings and annual general meetings, remuneration of directors, re-appointment of directors after completing the term, composition of sub-committees, etc. Key things to look here is composition of board of directors, sub committees and attendance records of directors during meetings, relate remuneration paid to directors with profits earned by the company. Analyse whether profile of independent directors match with the requirement of company as per sector of a company.

8) Risk Management Report : Risk management report discusses various dimensions of an Enterprise’s risk management. This report gives an insight of what could be the uncertainty that good cause actual results to differ materially from those reflected in the forward-looking statements. It also outlines what are the procedures a company takes as precautionary measures to manage the risk in an efficient manner.

Below is a snapshot of Risk Management Framework of Infosys:

9) Share Holder Information : This section gives information on historical performance of share price of a company, share holding pattern of the company that is how many shares are hold by promoters and how many shares are hold by public, pledging of shares by promoters during the year, split of shares, bonus shares distributed, dividends given by the company etc.

10) Financial Statements : In this section there will be two forms of financial statements

1) Standalone financial statements

2) Consolidated financial statement

A financial statement gives detailed information on following aspects:

1) The Profit and Loss statement

2) The Balance Sheet and

3) The Cash flow statement

Let me explain the difference between Standalone and Consolidated financial statements with help of an example :

Suppose there is a company named “A” which has 51% stake in Company “B” and further Company “B” has 100% stake in company “C”.

Company A

51% stake

Company B

100% Stake

Company C

Here company C is subsidiary of Company B which is again a subsidiary of Company A.

Now during a financial year, Company “B” makes a loss of (100 crores) while in the same financial year its subsidiary Company “C” makes a profit of 80 crores.

By mathematical calculation we can say that Total Profit/loss of company “B” evaluates to Loss of only 20 crores (Rs. 100 Crore Loss by “B” + Rs. 80 Crore Profit by “C”)

Therefore, we can say that on standalone basis company “B” made a loss of (100 Crores) while on consolidated basis company “B” made a loss of only 20 crores.

Hence, a consolidated financial statement covers the activities of the parent company and its subsidiaries in a single report, as if they were all a single company operating under one roof.

Stand-alone financial statements, by contrast, treat each entity as if it were entirely separate – the parent unrelated to the subsidiaries, and the subsidiaries unrelated to one another.

In this chapter we learned about the structure of an Annual Report, in next chapters we will learn how to analyse each and every part of the Annual report in full detail.