When asked how he becomes so successful in investing, Buffett answered: “
we read hundreds and hundreds of annual reports every year”.
When someone invests in a company, he/she is not just buying a share but also becomes a part owner of the company no matter what quantity of shares he buys. So, reading the annual report is important for investors to get the overview of the company.
So what is an Annual Report?
The annual report is a summary of a company’s performance and progress during the year.
Reading the whole annual report is a very challenging task, especially if you are new to the world of investing or you are just an individual investor with a full time job.
But we will tell you some of the important sections which will help you to efficiently read an annual report.
To begin with, let’s focus on the first part of the report i.e.
Chairman’s report: Chairman’s report highlights corporate activities, strategies, researches, labour relation, main achievement, focus on future goals and growth. Investors should carefully read the futures plans and strategies of the company.
Director’s report– This section provides brief summary on financials, explanation of the financial results and key developments in the company. While reading this section investors should focus on key things like capacity addition, capital expenditure plan, and order book.
Management Discussion & Analysis– This section provides information on trends in the industry and future growth prospects, segment wise analysis of the company, etc. Investors should focus on whether management has achieved the set revenue target over the years or not.
Shareholdings Information– In this section, Investor needs to check if there is any change in the top stakeholders of the company and also should look into the change in pledged share of the promoter if any. Promoters use their share as collateral to raise fund from bank and financial institution. Rising of pledge share creates risk for the shareholders.
Qualification and Salary: The annual report provides detailed qualification and salaries of the directors, key management people responsible for decisions of the company. Investor should look at the number of independent directors in the company, to understand the strength of the board, and check if there are some eminent personalities.
Auditors Report: This section provides the comments by the auditors on the financials of the company. Auditors report gives investors a snapshot of authenticity of financial information.
Financial Highlights– This section gives a snapshot of the performance of the company in a user friendly manner. Most companies give financial highlights of the past 5-10 years which helps in understanding how the company has grown in relation to its past. It helps in analyzing trends of its financials.
Financial statement-This section provides detailed information on profit and loss account, balance sheet, and cash flow statement. It gives you the hint bout the financial strength of the company. We have discussed in details about the financial statements in other videos, so do check them as well.
Notes to accounts– It contain the detailed breakup of numbers shown in the financial statement. An investor should study notes to accounts along with the financial statement to get better understanding of financial statement.
Reading an annual report becomes an advantage for the investors because it gives them the overall overview about various aspects of the company. Very few people do this and hence get wrongly trapped. It is important to note that, reading through only one year annual report won’t give you much insight. You need to go through at least 5 years of annual report to form a better opinion about a company.
Every company has a different chronological order thus what most of the companies follow is what we have followed here
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