HOW TO READ AN ANNUAL REPORT?

 How to pore over annual reports to glean about a company or its growth prospects?  May seem terribly dull to most new investors.  Time when there is overflow of information across media channels.  Scores of analysts churn out stock calls on daily basis.  May be tempted for taking short cut and just looking up financial snapshots on the internet.  Nevertheless the annual report remains the most authentic source of information about a company.  Contains important facts about its financial condition growth strategy and current challenges.

 That are not readily available upon Internet search.  A well written report can give you a rare glimpse into managements outlook for the industry or its views on new trends in markets.  A quick guide to reading this document will help any current / prospective investor  Manner of presentation differs from one annual report to another.  Some are comprehensive that promise to be one shop guide to the industry and company  Some others barely made the cut when it comes to providing crucial information.  Major components of ARs.

 The directors report which will detail the companys operational performance in the year gone by Management discussion and Analysis. Where the management provides an out look on the industry competitive scenario, new challenges, risk factors and out lines for future strategy. Detailed financial statements of the company and its subsidiaries as well as consolidated financial along with auditors report. How to start?  May be fascinated to find pictures of happy employees participating in corporate events.

 But better to skim through all that gloss and start with Directors Report.  Directors Report will give you an overview of the companys performance across various segments / idea of the factors that drove performance.  For those unfamiliar with industry in which the company operates, better start with MDA.  Clueless about the pig iron industry?  Read Tata Metalicks report on the global Pig iron foundary market and pig iron price trends.  Report also includes an interview with Tata Metalicks management.

Tata Metaliks Management  That discuss some of the key events during PY and to perceptions about the competitive scenario.  Companies views on a variety of topics that concern their industry such as: Government regulation Consumer or user industry trends Changes in global picture Articulation into their own plans to capitalise on unfolding opportunities.

 Between DR and MDA you get Fairly good idea of the businesses the company operates in Its key focus areas Challenges ahead Measures it has in place to improve financial performance in the year ahead.  For Number Crunchers Some feel numbers that do all the talking FS in the AR provides you with details that you are unlikely to find in BSE/NSE Websites. One may figure out the extent to which a company is able to fund its expansion plans on strength of its current operations by looking out its CF statements.

 Schedules to accounts provide Break ups of income , expenditure and other items Knowing what components constitute other income specially of it has been a significant contributor to profits of CY. Item wise split of O I Help you decipher how much of non operating income is recurring in nature. Provide segmental information both geographic and business.  Schedules elaborate on B/S items such as long term and short term loans.

 For any retailing company inventory position is very crucial. You may have to compare the inventory position over a three year period to understand how efficiently the retailer manages to stores.  For cash rich companies the quality of their investment book may play a crucial role in valuations.  AR also discloses the financial information on the companys subsidiaries bends providing financials on a consolidated basis.  Normally new high growth ventures are typically routed through subsidiaries.  Companies are beginning to command valuations based on their consolidated numbers.

 Notes on account give you Accounting treatment of various revenue/expenditure terms. Those not familiar with accounting practices can make so with changes in accounting policies. May tip you off on the impact of one time carrying on expenses.  Looking at qualifications of accounts you get any assumptions made while preparing or auditing accounts.  Nooks and Corners Management background projects of directions /share holding pattern of company. Production and Utilisation figures Manufacturing concern Installed capacity (utilisation) can give idea of efficiency in operation.

 Head room for future volume growth Pertinent for a company planning for future expansion. IPO proceeds utilisation for newly listed companies / progress on expansion as outlined in companys document/IPO proceeds utilisation. Notices to resolutions - Special resolutions merit attentions Resolutions passed to increase borrowing limits to leverage its B/S figure. Explanations on why the resolutions has been mooted. Ex: Colgate Polmolive Indias latest A/R explains the reasons for the declaration of a special dividend and capital reduction.

 Any check list is far from exhaustive  Going through all this mean lot of time and work.  Does made your information were authentic than the tip from your broker /friend or the analyst on TV.