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How To Read Company Annual Report

ICICI Securities 08 Jul 2022
  • Annual reports show the financial health of companies
  • They also show the future plans of a company
  • Apart from that, they also have details about corporate governance and other norms that companies follow
  • They also contain information about the leadership of a company

There are many lessons to learn from the past market downturns when companies turned from hero to zero and investors were left with nothing except regret. Therefore, it is important to understand a company before investing in it. A company’s annual report is a one-stop solution for this.

Annual reports are the most effective tools that an investor can use to evaluate the financial situation of a listed company. They contain a wealth of data to aid investors in finding out a company’s financial situation.

As per the regulatory requirement, every listed company needs to come out with an annual report. Over a period of time, annual reports have become more exhaustive as more disclosures are included in the report. You will find the annual report in the investor relations section of companies’ websites.

Here are key things you should look for in an annual report.

Financial Performance

Before buying a stock, it is important to know about the company’s financial performance. Growth in sales and profit over the last four to six quarters will help you understand its performance in the light of the recent market scenario. Its growth rate in the last four to five years will give an insight into the pace of growth in the past. Look at the operating margin growth as well, especially in the current operating environment which is seen as tough. Remember to look at the consolidated and not standalone performance. Consolidated performance includes the results of all subsidiaries, joint ventures and investments in associate companies.

Balance Sheet

The balance sheet helps you understand the financial leveraging capacity of the company. Many companies, especially those from the pharmaceutical and IT sectors, are under stress due to high debt and losses on foreign currency borrowings. Many investors ignored the foreign currency convertible bond (FCCB) details before the 2008 stock market crash and suffered huge losses. This also provides you information about the company’s debt-equity ratio. This should be considered before investing because high debt-equity (normally above one) suggests that the company has been aggressive in financing its growth through debt. If the company’s operation is under stress due to the economic environment and its balance sheet is debt-burdened, then it would be better to stay away from its stock.

Director’s Report

This section of the annual report provides you information about operational parameters such as the order book, capital expenditure plan and future expansion plan in terms of product or capacity.  You should you look at the reports of the last three to four years to understand whether the company has achieved its past forecasts or not.

Report on Corporate Governance

This section gives you information about the corporate governance norms followed by the company. Key things to look at in this section is the composition of the board and remuneration of directors and whether they are in line with the company’s profitability or not. You should also look at whether the profile of independent director’s matches with the company’s requirement or not.

Auditors Report

This section gives you information about the company’s financial reporting. You should read carefully what the auditor has mentioned in its report. This carries vital information for prospective buyers as it has information on whether a company follows an ethical and transparent reporting system or not.

The Final Word

Annual reports are a complete directory of companies as they tell you about not just the present status of the company but also the past performance. Read to annual report before owning the shares of the company.

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code:-07730) and BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

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