How to Read Annual Reports to Make Better Investment Decisions
Investors need an annual report to understand a company’s finances, management, and operations. How to read and interpret these reports for informed decision-making.
What is an Annual Report?
A company’s annual report provides shareholders and investors with valuable information. It includes financial data (profit and loss, balance sheets, cash flows).
- Management review and outlook.
- Company performance highlights and challenges.
An annual report’s information is reliable because the company issues it. However, intentional or unintentional errors can be challenged legally.
- Annual reports pertain to the fiscal year ending March 31 and are typically published between May and June.
- You can find the report in the ‘Investors’ section of a company’s website under headings like ‘Financial Reports.’ Alternatively, a hard copy can be requested from the company.
Key Sections of an Annual Report
The structure of annual reports varies, but most follow a similar format. Let’s break it down using Eicher Motors’ 2018-19 report as an example.
1. Corporate Review
Financial performance, shareholder messages, and operational updates are here. Eicher Motors provided two-year financial trends. Brief summaries should be compared to detailed financials for more information.
2. Management Review
Management’s discussion and analysis (MD&A) provides valuable insights into the company’s future plans, challenges, and strategies. Despite market slowdowns, Eicher Motors Managing Director Siddhartha Lal discussed capacity expansion, indicating growth.
3. Statutory Reports
This section covers corporate governance, business responsibility, and related party transactions. Investors should examine:
- Reward trends for key employees—disproportionate raises without profit growth—are concerning.
- Corporate social responsibility and governance.
4. Financial Statements The backbone of the report, comprising:
- Profit and Loss Statement: Evaluates revenue and expenses.
- Balance Sheet: Details assets and liabilities.
- Cash Flow Statement: Tracks cash inflows and outflows.
Know the difference between standalone (core business) and consolidated (core business + subsidiaries) data. Eicher Motors’ consolidated figures show subsidiary contributions like VE Commercial Vehicles, helping assess its financial health.
5. Subsidiary Review
A detailed analysis of major subsidiaries, like Eicher Motors’ VE Commercial Vehicles, can reveal key performance drivers or challenges.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.