Reading and understanding annual report is no more esoteric to a retail investor. Burying yourself with papers is not going to help you in pulling better organization or building a strong conviction to pick a multi bagger. Investing is risky when we know very little about the business which can be reduced by consuming knowledge about the business operations and intricacies of implementation is the only way for successful investing. To support your own choice, real facts should back to profit from the real world.
Annual report of a company, is a document that presents every operation of the business, from raw material price volatility to the product sales volatility. The strategic planning, manufacturing capability, financial strength, leverage control, capital efficiency, authority, Knowledge base, remuneration, stress situations, anticipated losses, faults made, accepting mistakes, work environment and other uncountable factors are expected to be communicated through the annual report.
A document which gets released containing much noise and less needed information by the corporation on its business operations. This document runs miles to elaborate the day to day business activities and the financials involved, which is recorded for the financial year to showcase the performance to shareholders who are fraction owners of the business. Some of less important parts of an annual report:
- Leave any information on stock price or market performance parameters.
- Disclosure, Sections, Act, time consumers.
- Low exposure to foreign currency lending and trading losses.
- Non executive directors who are blood relation, spouse with no holding and less remuneration.
- Glossy texts and attractive images.
Most of the businesses diversify very soon as they lack innovation in the original domain in which investments were done.
Gothi plascon India Ltd., the name suggests that the business involves plastic and it did 3 years ago and now renders it’s extra acres to get into real estate and they are fairly profitable. This company was priced less underwent basic screening and still being a lousy business. The annual report is a scanned document and no segment information was provided.
What the company has in target and whether it is achievable. If the target set is a number, promise of making sustainable earnings, carbon neutral, looking for a 5 year annual report can build confidence over the organization, because when a director promises, it should be in real action for you to profit from. Turning green on reading the statement produces only dead flowers. The basement is laid years before for them to be placed in the annual report, rewinding back to years from now proves the promoter is still on track and is doing any bit that has been promised.
Segment performance, reason for degrowth in revenues, Capex, Raw material price trends and revenue anticipation with respect to certain aspects.
Remuneration, Recruitment, Work Environment, Knowledge diversification, Experience, all these factors is to be consolidated before trusting the management and its ability to attain the stated vision. Qualitative analysis revolves around this section to build confidence about the efficient execution of managers and unceasing innovation to stay afloat. Corporate governance can be easily brought down as a checklist to know the structure that is favourable to shareholders, if not, the ethical reason behind the arrangement.
Industry forecast by the company:
To know in what kind of economy they operate, whether are the well positioned for what they have conceived or in the real world they play because forecasts are mere assumptions. Reading onto more than 3 will help the investor to know which environment is right and who is adapting right strategies, being pragmatic, to overcome foreseeable economic challenges. As a matter of fact a well detailed information on the sector can be derived from industrial players that has the data richness more than any other source possible could.
The whole report:
A gorgeousness always has the devil with in. The glossy look of a report with pictures, too many positive charts of meaningless parameters, this might attract kids to read by investors need simply presented straight forward information. If an investor is looking right, the information should be tented in the respective sections for the annual report to be easily understandable, looks neat and no extra time is needed to cleanse doubts and crunch numbers.
The section talks about the auditor’s view and fair conduct of auditing the particular business. The clues are the adjective used that smooches negative part of auditing, but no clear explanation is recorded. The sentences are intentionally framed in an indirect way so a novice reader gets taken away by the words. Changing accounting policy, reserve tweaks are reported with a rationale backing them and must be made clear to the level of making statements reliable.
The statements made by auditors are called qualified opinions, and the auditor specifies an adverse opinion in case of a discrepancy from recommended standards.
More like commenting on the vague information presented, as it is mandatory to report every change the numbers undergo, readers tend to skip or overlook the bottom part of any page, which cites on reference or comment on a designated part of the text above.
Footnotes are additional information on the matter which demands further elucidation in the context presented. Footnotes under every table or a picturization states the reason on abnormalities of the presented numbers or information. The beginning lesson for an investor is to read the footnotes in order to bring out the lurking devil.
Cash Flow statement:
Even though this comes under financial statements, cash flow statement deserves peculiar importance analysing a company. Income to the firm is subject to manipulation in numerous ways, cash flow statement in built on pure cash transactions in and out are guileless, or the income statement needs to be adjusted to ideal industry analysis needs.
Majority of American enterprises use LIFO if at all any firm uses FIFO for valuing inventory, change must be made to make it a fair comparison.
One major inclusion to make cash flow statements complete is by adjusting for depreciation a cashless expense that is excluded and capital expenditure which in some point has to be done to improve or expand operations.
Financial statement talks financial strength of the company, stress management, profit sustainability, state of leverage, debt servicing. This part of the annual report reveals the quantitative side of the business, a report with good numbers is called a strong balance sheet. The income statement tells how efficient the business is conducted, major attributions can be capital expenditure, inventory vs sales, Even after a century of market happenings, the reliability of financial statements hasn’t attained the scam proof standard. Some of the company financials to examine:
- Is ROE declining or improving?
- Can the debt be serviced with the current cash flow?
- Is the profit margin sustainable?
- Source and cost of capital
- After paying debts, there is hardly money left, can the company add value by reinvesting?
- Look for non recurring items or one time spending.
- Expensing and capitalising research products.
- Exploiting capital by paying hefty dividends.
- Is raw material and inventory sufficient enough to feed demand and growing along with sales?
- What’s the fraction of non core income or interest income?
One of the least reliable part of an annual report, if the company is lying about its operation, evident that it can derive strength from false projections. This segment is not trustworthy, but an investor can check whether the threats are addressed and opportunities are explored soon.
After all the reading is done, it’s the ability of the investor to process the information and arrive at the conclusion of buying or hopping to the next report. Of course, reports say what has already happened, clear vision of the industry is formed when the information processed is refined to the current market trend. In the world of data, (we hope)the above content helps any investor in spending less time dwelling on one single document. To gather information, where to search for reliable information? Will help you.