ANNUAL REPORT

Annual Report: Why savvy and big investors read the Company’s Annual Report

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What should be read in Annual Report

An Annual Report is more than just numbers; it gives great and more useful insights about company and its business. It highlights the company’s future prospects and management concerns. As a careful reader, we need to focus on following key parts of an annual report –

  • Letter to shareholders from Chairman / President / CEO of the company.
  • Key Responsibilities
  • Auditors Report
  • Management discussion and analysis.
  • Financial Statements
  • Notes on financial statements 

Letter to shareholders

  • In an annual report, Letter to shareholders highlights the company’s positive aspects of the year and negative aspects may be presented somewhere in the middle. It mainly focuses on positive news of the company and try to minimise the negatives of the company. So, don’t let the letter fool you and never make an investment decision solely dependable on this letter.
  • The shareholders letters try to present company in best light using maximum positives, but some niceties indicates that what is being presented may be completely or partially different from the real picture behind the scenes, such as –
  • The phrase like that “corrective actions are being taken” makes an attempt to hide the bad side of the company, this is why, to know the cause and plan a savvy investor must refer to notes on company’s financials and management discussion and analysis section.
  • The term “Difficulties”, look on the notes on company’s financials and management discussion and analysis section for details.
  • The term “Challenging” is used when a company is facing significant difficulties and has significant problem in its core business operations.
  • The term “Restructuring” indicates that the company may spend significantly to fix something that isn’t working well for the company.
ANNUAL REPORT
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Key Responsibilities

  • This is the right place where we can learn who is who? to wit, a list of the Board of Directors with brief bio, top executives and sometimes managers with their responsibilities.
  • We can learn the backgrounds of key personnels and top executives of the company what expertise and experience they hold.
  • Usually, this section may immediately after the section of letter to shareholders.

To learn more about Annual Report, click

Auditor’s Report

  • An investor or individual, who are interested to invest in stocks, they must read very carefully the auditor’s report in the annual report first to find out whether the auditor raised any red flags about the company’s financials and why?
  • If an investor doesn’t read the auditor report first so it is most likely that they can miss some critical information about company’s financials.
  • Investors must jump on to “notes on company’s financials” and “management discussion and analysis” to get the answers of auditor’s red flags.
  • Company may present an audit report by the independent audit firm to lend the credibility of management assurance.
  • An audit report doesn’t make an indication that the company is a good or bad investment and don’t endorse the company’s financial health. They only present their view on company’s financials.
  • Auditors cannot check each and every transaction of company, this is why, their reports don’t give 100 percent assurance about company’s financials, which means it is likely that company’s financials may also include misstatements.
  • When auditor find the problem, then the audit report is “nonstandard auditors report”. In case of nonstandard audit report, the investor must read the notes on company’s financials and management discussion and analysis and find out that what will be impact of problems reported in nonstandard audit report in a short-term as well as long-term, and what is company’s management doing to fix that problems.

Click to learn about the top executives of company.

Management Discussion & Analysis

  • This is one of the most important sections of an annual report and every savvy investor, institute investors and ultra HNIs read very carefully this section even twice or thrice to learn more about most basic information about the company.
  • This section tells that what went right and what went wrong over the year.
  • It is the discussion about company’s current operation, liquidity, capital, future prospects, performance and improvements of individual product and services, company’s distribution network, R&D, manufacturing capacity, comparison of bottom line with historical data, inflation, competition, past and future CAPEX, merger & acquisitions, business expansion strategy and plans, cash- flow, company’s financial obligations, market trends, challenges and uncertainties. Company may include forward looking statements under this section.
  • The management discussion & analysis section also covers some other insights, such as – revenue recognition, stock-based compensation, pension plans, employee benefit schemes, restructuring and impairments of assets etc.
  • Investor must contact the investor relations department of the company to get clarification in case of any confusion or discrepancies.

Financial Statements

  • This section represents company’s all assets, interest bearing financial obligations, trade liabilities, cash flow, revenue, expenditures, gross profit, operating profit, net profit, shareholder’s equity, and losses through company’s balance sheet, cash flow statement and income statement.
  • The financial statements must be compared with similar time periods, for instance – income statement of the second quarter (July to Sep) of a year must compare with the second quarter of last year or past years.

Notes on Financials

  • Notes give the details and show the picture behind the numbers.
  • Companies disclose the problems into the lines of notes, this is why, companies print notes in fine print. For instance-
      • Accounting methods used
      • Key financial commitments
      • Changes to accounting methods

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