What to Read in Annual Report of a Company

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What is an Annual Report?

Annual Report is an important document which is published by a company at the end of every financial year. This report contains an overview of the company's performance, plans, financials and a lot more which we will cover in the later part of this article in detail. This report is intended to give important information about the company and its financial performance to its investor and related parties. All the facts and data available in the annual report are assumed to be authentic because all the financials are attested and stamped by an auditor which certifies the authenticity of the financial reports.

Any misinterpretation in this report will lead to strong actions by industry regulators and SEBI. Since the annual report gives overall information about the company, which makes it very lengthy and sometimes filled with finance jargon and eventually makes it difficult for an investor to read the whole report. You must be thinking that why it is soo essential to read an annual report of a company? Well by reading an annual report you can get an overall idea about the company's business, industry performance, and who runs the business i.e management which will help you analyze whether it is worth investing in the company or not.

Important Elements of an Annual Report

Annual Report is divided into many sections each section has useful information about the company but to analyze the core business and performance you just need to understand and analyze 7 major things which are as follows:

• Company Overview
• Key Management Message
• 10 Years Financial Highlights
• Risk
• Management Discussion and Analysis (MD&A)
• Management
• Financial Statements

An annual report of a company is freely available on their official website and a soft copy sent to the investor after the end of the financial year. In case you wish to read a physical copy, you can ask the company investor relations department for the same. Now let's understand each section one by one. For better understanding, we have taken the example of Dabur FY 2019-20 annual report. You can refer to any company report because the above elements will be the same.

• Company Overview: This section will help you get a basic overview of the company like what is the core business and how they earn, geographical presence, brands, products, general philosophy, and a summary of business strategy. In the case of Dabur, they manufacture and sell FMCG (Fast Moving Consumer Goods) products which have a huge range of products related to household, personal care, food products, etc. They have a strong brand positioning with some well-known names like Hajmola, Vatika, Chavanprash, Real Fruit Juice, etc.

• Key Management Message (Chairman's Message):  In this section, you will get an understanding of the current scenario of the company, how it has performed so far, what are the improvements in the financial condition of the company, and how it will impact the profitability. Along with this, you will also get an idea on what is their vision ahead and how they have planned to meet the company goals.

• 10 Years Financial Highlights: Here you can analyze the long-term financial performance of the company. A company with consistent growth is always better when compared to a company with very dynamic financials which you can identify by referring to this section. You have to closely focus on 3 major things which are company revenue, profits, and profit margins.

• Risk: This section will give a detailed understanding of what kind of risks the company is dealing with and what steps are they taking to mitigate such risk. There are 2 major types of risk that are common in the majority of businesses i.e. Competitive and Regulatory risk. Competitive risk means risk from existing and new competitors which can directly affect their top-line growth wherein regulatory risk is the risk from industry regulators. Apart from these two there several other risks like Information Security, Exchange rate risk, Inflation risk, etc.

• Management Discussion and Analysis (MD&A): This is perhaps one of the most important sections to look at which will give you a detailed understanding of the macro conditions of the country that includes the performance of GDP so far and what could be the further trend. You will also find a detailed analysis of the industry as a whole and how is the company positioned which is followed by in detailed explanation of the marketing and business strategies the company is adopting.

• Management: Management is the main driver of the business. It is said that if the management manages the company during bad times then there are very high chances that the company will outperform during good times that's the reason why renowned investor Mr.Vijay Kedia put a lot of emphasis on management analysis. In this section, you will find details of company management right from their educational background to their professional experience and you can also identify whether any management personnel is involved in any fraud or scam and how is the overall corporate governance. Corporate governance means how ethically the company is doing the business and is the quality of the products are matching the prescribed standards.

• Financial Statements: Now this section is filled with numbers. There are 2 variants of financial statements viz. consolidated and standalone. The only difference between these 2 statements is the financials of the subsidiaries are involved in consolidated and vice versa. The financial statements are of 3 types i.e. Profit and Loss Statement, Cash Flow Statement, and Balance Sheet. A short explanation of these statements are as follows:
  • Profit and Loss Statement - This statement summarises revenue, cost, and expenses incurred in a specific financial year.
  • Cash Flow Statement - In this statement, you can analyze cash inflow and cash outflow in the company. This statement is divided into 3 parts viz Cash from operating activities, Cash from investing activities, and Cash from financing activities.
  • Balance Sheet - This financial statement presents the company's assets, liabilities, and shareholder equity.

Key Takeaways from this Article:

• An annual report is an important document which is published by the company at the end of every financial year. This report contains a detailed overview of the company's management, financials, products, business strategy and a lot more
• This report is intended to give important information about the company and its financial performance to its investor and related parties.
• There are 7 important elements which one should thoroughly analyze which are Company Overview, Key Management Message, 10 Years Financial Highlights, Risk, Management Discussion and Analysis (MD&A), Management and Financial Statements.
• Financial Statements are of 2 variants i.e. Consolidated and Standalone which are of 3 types i.e. Profit and Loss Statement, Cash Flow Statement, and Balance Sheet.