Its Time for Annual Reports

It is that time of the year when investors start receiving the most

critical communication tool from the company, namely the

annual report. An annual report provides a summary of how

a company has performed in the year that went by, and how

it is likely to perform in the forthcoming year. 

For companies, it is mandatory to send a hard copy of the

annual report to each and every shareholder. While a lot of

shareholders merely keep annual reports aside or throw them

away with old newspapers, there are important cues which

savvy investors pick. 

In fact, for the general public, the annual report is the only

financial document that they get to see. Hence, for existing

shareholder, it could be the best source of information to

determine the financial health of a company and to learn about

any problems or opportunities in the business environment. 

Here are some important things that you could look for

in a balance sheet.

Balance sheets can be designed in any shape and size. Also, there is

no mandatory rule which specifies the quality of paper to be used

in an annual report. 

Hence, while some companies come up with a plain vanilla annual

report with simple fonts, simple colours and pay little attention to

page layouts and displays, there are companies which use

high-quality paper, take special efforts to design it and ensure

that the annual report is really presentable to their shareholders. 

“How the annual report looks and feels conveys its image and

speaks volumes about the ability of a company to market itself

in the corporate world. Quality of paper used in the annual report,

many a time, is proportionate or signifies how well the company

is doing,” said Alok Churiwala, managing director, Churiwala Securities. 

Sending the annual report by courier or speed post, as compared to

ordinary post, could denote how important an investor is for the company.

Management discussion and analysis

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This section is of prime importance for research analysts as well

as fund managers. It gives you an overview of the previous year

of operations and how the company performed. 

Besides this, most importantly, the management shares its

vision for the coming year, updates on projects which are

in the pipeline and thoughts on future projects. However, investors

should keep in mind that unlike the numbers, this section is unaudited. 

“Management discussion and analysis is very important to me in

case of multinational companies, where there is less communication

by way of conference calls or analyst meets during the year,” said

Anand Shah, head (equities), Canara Robeco Mutual Fund.

This section gives you important clues as to the direction in which

a company is thinking, how they think the year ahead is going to be

for the industry and how the company will fare.

Financial statements and strength of balance sheet

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Shareholders like to look at the income statement as it denotes

how the company is performing in its business, how much profit

the company is making and what is it earning from its core

operations. Portfolio managers and analysts are concerned

about the strength of the balance sheet. 

“I look at things like inter-group loans, investments, cash and debt

position in the balance sheet prior to making an investment decision,”

said Vaibhav Sanghvi, director (funds management), Ambit Capital. 

There are things like auditors qualification, or one-off expenditure

which raise a red flag and need to be considered further by analysts.

Then, there are things like cash flow statement which is sacrosanct

for most analysts.