The Hindu Business Line : Delve deep into reports

Yet again it is that time of the year when companies give out their year’s performance and the mail brings in glossy, thick annual reports. These reports are usually a treasury of information about a company and careful reading could reveal a sharper picture of the company’s performance and prospects. Still, you don’t really need to go through every little bit of information.

What you need to know is how the company has performed in the year gone by, how it has met challenges, how it is placed financially, and its prospects for the future years. So, for the new investor, detailed below are the key areas to examine in an annual report.

Year’s performance

Begin with understanding the company and its business. A look through the director’s address will give you a quick overview of the company’s operational performance, segment performance if it operates in more than one, overall and segment growth, and a financial snapshot. Move on to the management discussion and analysis (MDA), a rather more detailed section.

You may, however, skip details related to its manpower, social responsibility initiatives and such. But remember to focus on the information given about the industry in which the company operates.

This section details the factors affecting the industry, impact of past and potential policy changes, the company’s own initiatives to exploit opportunities or combat challenges, giving you a good grasp of the industry and the company’s relative position within. Also included could be production figures, manufacturing capacity utilization and basic ratio analyses.

For example, the MDA of Asian Paints contains extensive information on each of its product lines with the industry-wide scenario and region-wise performance. Other information that may be spared a look is research and development efforts and risk factors. Often, plans for the coming years are outlines which may help you know where the company is headed in the future besides comparison with the plans of its peers.

Financial performance

Well, as an investor, your attention will undoubtedly focus more on the company financials. Financial details are most comprehensive only in an annual report. So go beyond the balance-sheet and profit-and-loss statements and look at the schedules to the accounts. Both balance-sheet and profit-and-loss items are broken up into finer details here.

For instance, looking at expenditure throws up its key contributors and the company’s vulnerability to those, debt figures are further elaborated on, inventories — important figures for most companies — are given in greater detail, segment revenues are detailed.

Cash flow statements will give you an idea of the extent to which the company depends on external sources of funding. Keep in mind, always, that figures need to be looked at over a period of years; one year’s figures aren’t going to tell you anything.

Bits and pieces

By now, you would have a good picture of your company’s health. But there’s more to the annual report, which may not be crucial, but still worth looking at. Look at notes to the accounts to check changes in accounting policies such as depreciation to gauge effect on profits, related party dealings, contingent liabilities, raw material consumption, forex earnings; the extent of disclosure here is an indicator of the company’s transparency.

Look also at subsidiary performance and consolidated financials to see how far subsidiaries add to, or detract from, the company’s profits. Often, companies diversify or take up joint ventures through subsidiaries.

If you’re still interested, go through the corporate governance reports to get to know the company’s top management and the Board of Directors and their remuneration, the quantum of shares held by various parties, and if you have not kept a track of stock performance, the price trends are displayed here.

So, dreary as the task may seem, don’t just give your annual report a perfunctory glance, take a deeper look to understand your company better.

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