Do you remember seeing a booklet filled with a company’s details coming to your house every year? This booklet, also known as company annual reports, may seem useless and scrap for an average person, however, it has a goldmine of information and insights for investors and market analysts. So how do you sift through the abundance of information available in the annual reports and what should you look out for? Read on to get the answers to these questions and more details on annual reports in this blog.
Before we begin with the details of the annual report, let us first understand the actual meaning of this booklet and its significance. Annual reports provide a summary of the details of a company along with its financial performance during a specific period, usually a financial year. These reports provide a starting point for the fundamental analysis of a company’s stock making them a vital tool. Annual reports are also made for an interim period during the financial year, i.e., for a quarter. Preparing annual reports is a mandatory requirement for public and private companies and they have to be prepared and submitted in accordance with the rules and provisions of the Companies Act 2013 and SEBI.
Annual reports can be accessed through multiple sources like the SEBI, MCA, etc. However, the primary and easiest way to get annual reports for a company for any year is through its website under the ‘Investors’ section. Annual reports provide a detailed analysis of the income, expenses, and financial position of the company and the developments made during the period for which the report is prepared. This detailed insight enables investors, shareholders and other stakeholders to make informed investment decisions and shape their investment portfolios.
An annual report is made up of several key components detailing different highlights of the company such as its financial statements, product details, future plans, etc. The components of the annual report are standard as per the guidelines of the Company’s Act, 2013. These components and their significance for various stakeholders are highlighted hereunder.
This is the first section of the company’s annual report. It highlights the company’s core values, history, business model and the industry that it functions in. This section essentially explains the key revenue streams of the company and its competitive advantages that give it an edge in the industry giving the stakeholders a brief idea of the company's position in the market and its growth prospects.
The vision and mission statement of the company talk about the ethos of the company its long-term goals and the purpose it aims to achieve through these goals. It shows the strategic decisions of the company and the direction it will lead the company which can help the stakeholders align their investment with their objectives.
This section provides a snapshot of the main products or services of the company and their performance in the market. This section also provides a snapshot or highlights of the company’s financial performance for the past 5 to 10 years giving stakeholders an idea of the growth and success story of the company.
This section represents a letter addressed by the company Chairman and is primarily for the company’s shareholders. It highlights the achievements, challenges during the year and future plans or paths set for the company in the short-term and long-term. It also discusses the market trends, growth strategies and the commitment of the company towards its stakeholders.
The Director’s Report is a detailed account provided and signed by the Board of Directors highlighting the company’s operations during the financial year for which the report is prepared. It showcases the key projects, performance metrics, risks, returns, dividends and future plans of the company to fulfil its commitments ensuring transparency for all the stakeholders.
The next section of the annual report is known as the Management Discussion and Analysis section and is prepared by the company’s senior management. This section is usually prepared by the company finance directors, financial managers and controllers to provide highlights of the company fundamentals, a brief explanation of the financial statements, and overall financial disclosure. It also provides brief details of the company’s liquidity, earnings and pitfalls during the year.
This section is quite important and highlights the governance framework that the company operates in and the defined roles of the Board of Directors as well as various other stakeholders. This section ensures and assures the shareholders that the company adheres to the regulatory framework and the ethical practices highlighted in the vision or the ethos of the company.
The financial statements are the focal point of the annual reports and the first point of reference for the shareholders and market analysts to determine the company’s financial viability, investment opportunity and growth story.
The financial statements of the company are essentially divided into three parts namely,
Balance Sheet - This statement shows the financial position of the company at the end of the financial year highlighting its assets, liabilities and equity.
Profit and Loss Statement - This statement is also known as the Income and Expense Statement of the company highlighting the revenues and expenses of the company during the financial year along with the net profit or loss position.
Cash Flow Statement - This statement is a detailed account that tracks the cash inflow and outflow from the organisation. This helps the stakeholders to understand the details of the cash generated from operational and non-operational activities along with its liquidity position and the ability of the company to manage its finances.
The auditor’s report is a mandatory requirement of the annual report without which it is considered incomplete and not eligible for filing with MCA or SEBI. The auditor’s report certifies that the financial statements of the company provide a true and fair picture of the company’s financial position and comply with all the relevant rules, regulations and accounting policies mandated by the Companies Act, 2013. The auditor’s report is prepared by independent auditors appointed by the company as per the provisions of the Act. These auditors examine the financial statements and issue an audit report which can be either clean, adverse, qualified or negative based on their findings and observations. The nature of the audit report is also used to determine the credit rating of the company and its financial well-being.
The final section of the annual report is the Notes to Accounts which provides a detailed account or explanation of the various parts or sections of the financial statements like the assets, revenue segments, changes in equity and debt, etc. These detailed accounts help the stakeholders understand the financial statements better and also the changes that happened during the financial year as well as the accounting policies used or any deviations and the reasons for the same.
The annual reports of a company are not just a compliance requirement but also an effective tool of communication for the company to relay its information to the outside world and build trust. These annual reports are used by a diverse group of readers to get insights into the company and make sense of the abundant company data. The target users of the annual reports are explained below.
The primary users of the annual reports are the investors and shareholders as well as the potential investors of the company to understand the company's performance. The in-depth analysis of the annual reports helps them make informed investment decisions to achieve their financial goals.
The other target users of the annual report are the employees and management as it helps them understand how their efforts have contributed to the company's success and the areas of improvements. Annual reports can help the management revise or alter their strategies to meet the company targets.
Annual reports are also a minefield of information for the government and regulatory bodies as they ensure the company is complying with all the mandatory laws. This ensures the transparency and accountability of the company and its management to adhere to the rules and regulations laid down by the regulatory bodies.
Annual reports are also an essential source of information for creditors and business partners to understand the financial health of the company and its future prospects. Any deviations from the credit cycle, fluctuations in the cash flow or revenues can be seen as a red flag and reasons for further analysis.
Banks and other financial institutions use annual reports to assess a company’s creditworthiness and the viability of existing liabilities as well as any potential ones to be extended to the company. These financial institutions analyse the company data to also analyse if the company is using the debts responsibly and for the intended purpose.
Market analysts, researchers, and students use annual reports to study industry trends, company strategies, and economic impacts. These reports provide real-world data that help them conduct studies, prepare reports and evaluate companies that can be further used by the general public or potential investors to make investment decisions.
A detailed analysis of the annual reports is essential to have a clear picture of the financial position of the company. However, a few common red flags can immediately highlight issues in the company or at least warrant further or targeted analysis by the users of the data. These common red flags include,
A consistent dip in revenues
Increasing debt levels
Frequent changes in the accounting policies can be potential window-dressing
Qualified or adverse auditor’s report
Higher related party transactions that can indicate potential collusion, manipulation/misappropriation of funds, etc.
High employee turnover, especially in key managerial positions
Legal or regulatory issues or high contingent liabilities.
The company's annual reports are the window into the company's operations, efficiency, financial health and future plans. These reports provide a deeper insight for shareholders who are the true owners of the company and can hold the management accountable if required. The annual reports of the company are thus a key resource for understanding its journey and its vision for the future.
This article is a snapshot of the annual reports of the company and the key areas highlighted in the report. We will address each section in detail in our coming blogs to provide a better idea of how to read the financial statements and pick the details needed to make informed decisions. Let us know if you have any queries on this topic or need any further information.
Till then Happy Reading!
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Marisha Bhatt is a financial content writer @TrueData.
She writes with the sole aim of simplifying complex financial concepts and jargon while attempting to clarify technical and fundamental analysis concepts of the stock markets. The ultimate goal is to spread vital knowledge and benefit the maximum audience. Her Chartered Accountant background acts as the knowledge base to help clarify crucial concepts and create a sound investment portfolio.
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