For any investment that is considered to be fundamentally correct it should be based on carefully studied information. People rarely fail when they gather data and churn it to make a calculated move. For investors eager to invest in the stock markets the most readily available information lies in the annual report of the company they look to invest. But sadly not many people make use of it, why?? Because they don’t know what information to look for and moreover what to make of it.I shall point out some of the key points that an investor should look for in an annual report.
Who’s in it?
One of the first things that appear on the annual report and one which rarely people read is the board of directors. A company is known by the board it keeps. Many Indian companies have this habit of selecting their family members or close friends, employees as board members. They would not like an independent voice in the board to question their judgment. A diversified board with experienced members will only enhance the company’s knowledge and open new opportunities. All good companies have a diversified board with eminent personalities from various related fields adding value to the company.
The graphic picture
The next information available is the financials highlights of 10 years. On one table the trend of how the company is performing is available. A steadily growing company is better than one which has spikes in the trend. There might be years in which the company would have launched a new product and numbers would have spurted or there could have been a sale of asset resulting in higher profits. An investor needs to see through these numbers, before arriving at a conclusion. Revenues earned, taxes to be paid, the total earnings net of taxes, liability and total debt are all reflected in this section which are laid out on a spreadsheet for investor to compare how the company has progressed
Follow through
Rather than focussing on the past as an investor we should be focussed on the key developments in the company and its future prospective course of action. The directors’ report provides crucial information furnishing the summary of financial along with the financial results. A look at director’s report of past few years would portray the direction the company is moving – whether the targets are being achieved, whether the strategies adopted proved beneficial for the financial health of the company , whether its targets are being achieved. This section thus provides important information for the investor.
The examiners comments
Before checking the numbers one should go through the independent auditors’ reports and go through his comments to check if they have qualified any information given by the company. Qualifying means noting faults in audit parlance. Independent auditors qualify information in case they feel that the company has wrongly presented the facts. Qualified accounts give a bad impression of the management integrity.
The number game
Financial statements of the company provide a crystal clear view of profits and losses incurred by the company. The income statement thus assumes tremendous importance together with the balance sheet and cash flow statements. One must always read the footnotes of these statements very carefully as they often carry valuable information about an organization’s structure and financial status which probably has not been categorically stated anywhere in the report.
Conclusion
Annual reports are the tools to help investor understand businesses at the same time check on the integrity of the management. Management commentary or perception built in the annual report may be tainted, but numbers do not. Reading annual reports and the various sections helps in separating the wheat from the chaff.
