Fundamental Analysis

How to read the Annual Report of the company? – Poonit Rathore

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How to read the Annual Report of the company? - Poonit Rathore
How to read the Annual Report of the company? – Poonit Rathore

3.1 – What is Annual Report?

Every company publishes an annual report once a year and sends it to its shareholders and other people. The Annual Report is published at the end of a financial year and all the data given in it is up to 31st March. The Annual Report is available as a PDF document on the Company’s website in the Investors section and can be downloaded. You can contact the company to get the book of Annual Report.

Since the information given in the annual report is given on behalf of the company, it can be considered official information, and therefore, if any mistake is found in it, the company is held responsible for the same. For your information, it is necessary to mention here that the financial data given in the annual report of the company is certified by the auditor of the company. 

The annual report of the company is specially printed for new investors and old shareholders. In this, important information is given to the investor. Also, it contains a message from the company. The best source of information an investor has about a company is the company’s annual report. Although many business websites claim to provide information about the company, the investor should stay away from them as the information given by the company cannot be trusted much.

You must be wondering why other media websites would give the wrong information. They may not be giving this information intentionally wrong, but there may be some other reasons, for example, the company shows depreciation in the expense side of its profit and loss statement, but the media website shows it It can be shown inside any other head, it will not directly affect the financial statement of the company, but it will change the way of looking at it.

3.2 – What to look for in the Annual Report? 

The different parts of the annual report contain a lot of information that reveals the company. It should be read very carefully because sometimes the company gives such information which is kept for marketing whereas you should keep an eye on the facts.

Let us look at the different parts of the annual report and try to see what the company reveals in it. To make you understand, here we have taken the Annual Report of Amara Raja Batteries Limited for the year 2013-2014. As you know Amara Raja Batteries manufactures batteries for the auto sector and industrial sectors. You can download the Annual Report of Amara Raja Batteries FY 2014 here. ( )

Remember that the main purpose of this chapter is to show you how to read an annual report. Therefore, it is not necessary to read every page of the annual report here, nor will it be the right way, but we will definitely try to tell you here how to read this report. Which information to use and which information to discard?

For better understanding, it would be better if you download this Annual Report of Amara Raja Batteries and try to read it along with us in this chapter.

The Annual Report of Amara Raja Batteries consists of 9 parts :

  • summary of financial data
  • Management Statement
  • Management discussion and review
  • 10 years of financial highlights 
  • Company Information
  • director’s report
  • Report on Corporate Governance
  • financial part
  • notice

Here you should keep in mind that no two reports are of the same type. Each report is slightly modified to suit the needs of the company and sometimes the industry as well. But some parts of the annual report are usually the same.

The first part of Amara Raja Battery i.e. ARBL ‘s annual report is the financial highlights. In the financial highlights, the company gives a brief account of its past 1-year performance. This part is usually shown through a graph or table. This section also contains a comparison of the past several years of the company’s operations.

The financial highlight looks like this:

All the figures you see in this section of the financial highlights have been taken from the company’s financial statements. Apart from this, the company can also put some financial ratios here, which are calculated by the company itself. I skim through it and don’t spend too much time on it. I do this because I calculate these ratios myself. By doing this, I get an accurate assessment of the company’s performance. In the next few chapters, we will try to understand how to read the financial statements of a company and how to calculate financial ratios.

It is followed by two parts – Management Statement and Management Discussion and Analysis. Both of these are very important. I spend a lot of time reading these two. This is where you get to know what the company thinks and has to say about its operations and the industry. Everything mentioned here is important to you as an investor. Especially what we talked about in Chapter 2 about the quality of the company.

Part of the management’s statement (also called the chairman’s message) provides an investor with a perspective from which to understand what the company’s highest-ranking executives are thinking about its business. This is very basic information, but it tells you where the company’s business is and where it could be going. When I read it I try to see how logical and rational is the company’s statement. Here it is also known whether the company has the right information about the condition of the industry or not. Does the company understand this business properly or not? Apart from this, I also see how honest the company is in telling the mistakes it has made or the things it has done right.

Here I am reminded of a message from the chairman of a well-known tea company, which I read in his annual report. In that message, the chairman said that the company’s earnings would grow at 10%, but all of his past data showed that the company’s earnings had never been more than 4.5%, so a 10% growth in earnings was not enough. Claiming, was an aerial claim. It was clear that the top executives of the company were not aware of the true market situation. So I decided not to invest in that company. Later, when I reviewed my decision, I felt that decision was correct.

Now have a look at the management’s message on Amara Raja Batteries Limited’s Annual Report below. I have highlighted a part that I find very interesting. You read this entire message:

After this comes the next part which is Management Discussion and Analysis i.e. Management Discussion and Review. According to me, this is the most important part of the annual report. Usually, companies start this part with the current state of the economy. She tells how the economic business is going in the country, how is the business environment and how are the companies thinking. If the company’s business is related to exports, then many times the companies also discuss the world economy and business environment.

Since ARBL ‘s operations are related to the domestic market as well as exports, the company has discussed both these perspectives in its Annual Report. Please see the picture below:

View of ARBL on the Indian Economy :

After this, the company usually discusses the trends of the industry and tries to tell how the future is looking for the company. Here we get to know what are the opportunities and what are the threats to the company in the coming time. I read it very carefully and then compare it with other companies competing with the company. This tells me whether the company is strong or weak compared to its competitors.

For example, if I have or want to invest in Amara Raja Battery, I will read this section carefully as well as read the same section in the Annual Report of Exide Batteries Ltd. and compare the two.

By this part of the Annual Report i.e. Management Discussion and Analysis part, the company is giving a comprehensive view. After this, the company talks about its business. It tells how the business is doing, what different parts are doing for the company, and how they are doing compared to last year. The company also gives statistics in this part. 

Have a look:

Some of the companies also discuss the strategy and directions for the coming year for their individual segments. Have a look below:

After the discussion and review of the company, there are many more small reports in the annual report, such as human resource report, research, and development report, technology report (Human resource report, Research, and development report, Technology report), etc. All these reports are important in terms of the industry in which the company is working. For example, if I am reading the annual report of a manufacturing company, then in the Human Resources report, I will get to know whether there is any problem regarding labor in the company. If there is any such problem then it can lead to the closure of the company’s factory and it will not be good news for the investors of the company.

3.3 – Financial Statement

The final part of the annual report is the company’s financial statements. You probably must have understood that the financial statement is the most important part of the annual report. There are three parts to the financial statement.

  1. The profit and loss statement
  2. The Balance Sheet
  3. The Cash flow statement 

We will understand these three in detail in the next few studies but here it is important to know that financial statements are presented in two ways 

  1. Standalone financial statement
  2. Consolidated financial statement

To understand the difference between standalone figures and consolidated figures, we need to understand the structure of the company. 

A good and big company can have many small subsidiaries or divisions. Sometimes companies also act as holding companies for other companies. To better understand this, let me look at the shareholding structure of CRISIL Limited. You will also find it in the Annual Report of CRISIL. You might be aware that CRISIL is an Indian company that is in the business of giving credit ratings to other companies.

As you can see above in the shareholding pattern :

  1. America’s credit rating company Standard and Poor ( Standard and Poor- S&P ) has 51% shares of CRISIL. So here S&P is a holding company or a promoter. 
  2. The remaining 49% is held by public or other financial institutions.
  3. But   S&P itself is a 100% subsidiary of another company, McGraw-Hill Companies.
    1. This means that   S&P  is owned by McGraw-Hill and S &P owns  51% of CRISIL. 
  4. Crisil itself owns a company Irevna ( 100% stake)

Now let us imagine a situation based on the information given on it. Suppose in the financial year 2014 CRISIL made a loss of 1000 crores and its 100 % subsidiary Irevana made a profit of 700 crores. Now, what is the total profit of CRISIL?

Very simply CRISIL made a loss of 1000 crores while its subsidy IREVANA made a profit of 700 crores i.e. total P&L of CRISIL (-1000 crores) + 700 crores = 300 crores

You have seen that due to the profit of the subsidiary of your company, the total loss of CRISIL has become only 300 crores whereas it was losing 1000 crores. If you look at the same on a standalone basis, then CRISIL incurred a loss of 1000 crores while on a consolidated basis, CRISIL’s loss was only 300 crores.

This means that the company’s own results are shown in this standalone financial statement. It does not contain the figures of its subsidiaries, while the consolidated statement shows all the results of the company, including its subsidiaries. 

I prefer to see the consolidated financial statement of the company as it accurately reflects the overall financial position of the company.

3.4 – Schedule / Schedule Schedule of Financial Statements

When the company gives its financial statement, it initially gives a brief statement and later it is given in full detail.

Here you can find the financial statement (Balance Sheet) of ARBL :

Each individual piece of information in a financial statement is called a line item. For example, the first line item in the balance sheet ( under equity and liabilities ) is share capital (shown by the green arrow). You must be seeing that here a note number has been added to the share capital, this is called schedule which is attached to the financial statement. After going through the statement of ARBL, the share capital is shown as 17.081 crores. As an investor, I would like to know how ARBL  calculated 17.081 crores. I’ll have to look to the company’s associated Schedule Note No. 2 to find out. See the picture below:

If you are new then you will not understand many things like share capital meaning of the financial statement. But by the way, it is very easy to understand the financial statement. In the next few chapters, we will explain how to understand and read it. For now, just remember that the financial statement gives you an overview while the associated schedule gives you the details.

Main points of this chapter

  1. The company issues an annual report to communicate with its investors.
  2. The best source to get information about the company is the Annual Report so every investor should read it first.
  3. There are many parts in the annual report which are talking about different things related to the business. 
  4. Annual reports are a very good source to know about the quality of the company.  
  5. Management Discussion and Analysis i.e. Management’s discussion and review is the most important part of the company’s annual report. In this, the management’s view about the country’s economy, how the industry will do, and how the future will be – all these things are discussed. Along with this, it is also told what the company did wrong and what was right.
  6. There are 3 financial statements in the annual report – profit and loss statement, balance sheet, and cash flow statement.
  7. The standalone statement shows only the financial data of the company while the consolidated statement contains the data of the company and all its subsidiaries.

Poonit Rathore

My name is Poonit Rathore. I am a Blogger, Content-writer, and Freelancer. Currently, I am pursuing my CMA final from ICAI. I live in India.

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