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Reading Annual Report of a Company


What is an Annual Report?

An annual report is like a report card that every publicly traded company publishes for each financial year. It has lots of information about the company which can help an investor understand more about the company in which he would like to invest.
Reading and understanding an annual report( along with quarterly reports, which are published each quarter) is indispensable for any successful investor.

This is one art that you need to master if you want to find and invest in companies that have the potential to give you great returns.

I, as a student of financial markets, read a lot of annual reports, up to 10 years of the annual report of the same company to better understand the company.

I am sharing with you my personal notes which I refer to while reading and analyzing annual reports of any company.

You can easily find the annual reports of a company on its website under the "Investors" section.

For e.g. You can find the annual report of Graphite India at http://ir.graphiteindia.com/assets/upload/pdf/053551900_1560431849.pdf


What does an Annual Report of a company contain? 

  • Overall business outlook
  • Industry outlook
  • Financial Statements
  • And a lot of other marketing content
  • Contains a lot of forward looking statements: When you say that you expect to grow by 5 times (just an example)
 
                                                                       What Makes AR boring?

Problems with AR
What People mostly do...
Lengthy
Zero attention to details
Jargon heavy
Skim through contents
Verbose
Miss the important parts
A lot of marketing
See the numbers and take it at face value
Useful content gets hidden

                                                                        

Why is it important?

  • Comes straight from the horse's mouth
  • Considered as the official statements of the company
  • Gives a sense of management sentiment
  • The cleanest source of data

AR is super important to read-especially for long term investors!

Always stick to Annual reports for any analysis and NOT any 3rd Party portal


80/20 Rule!

What you should focus on - 80/20 Rule: 80% of the important info is in 20% of the annual report

  • Initial Page
  • Chairman's letter
  • Board's Report
  • Shareholding information
  • Report on corporate governance
  • Management Discussion and Analysis (the single most important part)
  • Consolidated Financial Statements


Initial Page:

  • Management names-why is this important?
    • Extra information!
  • Family control
  • CFO -where he comes from
  • Auditors
  • Bankers

Chairman's Letter:
  • High-level overview
  • Industry overview
  • One line of business insights
Look for honesty from the chairman. Avoid the company if there is any kind of miscommunication

Board's Report:

  • Subsidiary information - too many not too good( Focus on this point)
    • chances of shifting money here and there
  • Management's salary- salary should be in ratio to the profit of the company
  • Related party transactions: how much money is going from the main company to the subsidiaries


Shareholding information

  • In subsidiaries: how much money flow to the main company from the subsidiary
    • In case the money flow(in or out) is too high: check the report of the subsidiary
  • Shareholding structure:
    • Promoters should ideally be majority shareholders
    • Has the mutual funds companies invested/held shares?
      • Why/why not? It may be good or bad? Why have mutual funds not invested in the company??
      • If it is an investable company, when mutual funds discover this and put their money, the share price will rise!!
      • Do you find a well-known name( e.g. Rakesh Jhunjhunwala) holding a lot of shares? This could be a good sign.

Report on corporate governance:

  • Board composition and other directorship
    • Check for relationships

  • Salaries paid to the board

  • Disclosures
    • Related party transactions: check the flow of money to and the justification is given by the management


Management Discussion and Analysis( most important section) ( spend at least 5 hours) 

  • Overview of the industry

  • Business performance
    • Capacity utilization: how much capacity of the manufacturing plant is being used- it should not be low.
      • Find out why?
      • Compare capacity utilization from previous years annual reports from the same company

  • Capex plans
  • Sector-wise performance and Capex: capital expenditure- money spent on building new plants factories assets etc.
    • The company should not be operating in multiple sectors/verticals
  • Note: Read an annual report of an ( even 3 companies) competitor company and read the perspective of the Industry from both the companies and analyze

  • Business Risks: Threats, Risks and Concerns --e.g. govt. subsidiary for fertilizer companies. rubber price for tire manufacturers

  • Forward-looking statements/Outlook


Consolidated Financial Statements
(Please ignore Standalone Financial statements)

  • Balance Sheet
  • Profit & Loss
  • Cash Flow

Always look for notes and schedules!!



Spend some time following my notes and trying to understand the details about the company. Use the information to fill this template to create your own research report.
Disclaimer: I am NOT a SEBI registered advisor. All my blog posts are written for educational purposes only and do not constitute specific financial, trading, or investment advice. The blog is intended to provide educational information only and does not attempt to give you advice that relates to your specific circumstances. You should discuss your specific requirements and situation with a qualified financial adviser.

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