“Annual Report Explained Understanding Company Financials and Insights “

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    4. “Annual Report Explained Understanding Company Financials and Insights “
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Marketopedia / Fundamental Analysis / “Annual Report Explained Understanding Company Financials and Insights “

What is an Annual Report?

At the conclusion of each Financial Year, all shareholders and other interested parties receive a yearly publication from the company – its Annual Report (AR). Accompanying this document is data from 31st March, available within it or directly from the firm’s website in the Investor’s section. Both a PDF version and a hard copy can be obtained from the company. 

The annual report of the company is assumed to be official, so any error in it can be held against them. To provide clarity on the integrity of financial information included in the AR, auditor’s certificates are included, signed, dated and sealed.

Potential investors and current shareholders should consider the annual report as the primary source of information about a company. It is important to note that even though many media outlets provide financial data on firms, these sources should be avoided in favour of the annual report – which is deemed to be more reliable. The report has to deliver its central message and provide all relevant details for effective decision-making.

One might wonder why the media website would distort corporate information. It could be unintentional or perhaps a result of external circumstances. For instance, the organisation could intend to place ‘depreciation’ in the expense section of the Profit and Loss statement. At the same time, the site may prefer to have it as an additional category. Although this wouldn’t affect the figures, it does disturb their sequence.

What should you look at in the company’s annual report?

The annual report comprises various sections that provide helpful information about the company. It is essential to be mindful when reviewing the report, as there can be a fine line between the factual data and promotional material that the company wants you to see.

Let’s look at what Amara Raja Batteries Limited (ARBL) tries to communicate in its 2013-2014 Financial Year Annual Report. You can access the document by visiting the link (https://www.amararajabatteries.com/Investors/annual-reports/). 

Keep in mind that ARBL manufactures automobile and industrial batteries. Doing this will allow us to understand all parts of the AR.

The purpose of this chapter is to provide you with a brief overview of how to go about reading an annual report. Going through each page in detail may not be feasible. However, I’d like to provide some guidance on how I scan and interpret an AR and what data can be disregarded from the document.

I strongly suggest downloading and studying the Annual Report of ARBL to get a better understanding of this chapter as we move through it.

There are 9 sections in ARBL’s annual report which are as follows: 

  • Financial Highlights
  • The Management Statement
  • Management Discussion & Analysis
  • 10-year Financial highlights
  • Corporate Information
  • Director’s Report
  • Report on Corporate governance
  • Financial Section, and
  • Notice

Each annual report is unique, meeting the needs of the company and taking into account their respective industry. Even so, some segments are consistent throughout all reports.

In ARBL’s annual report, the Financial Highlights is the initial portion which provides a high-level look at how the enterprise has fared financially in the last year. This section may take the shape of either a table or a graphical representation of data, and it generally performs an analysis of operating and business metrics over multiple years.

This is a glimpse of the situation. It outlines the current condition and its implications.

The Financial Highlights section provides an overview of its financial statement, including financial ratios calculated by the company. I quickly glanced over this section since it would be more helpful to calculate the ratios myself and gain a deeper insight into the company’s numbers. Later on in the course, we will learn how to read and analyse a financial statement, as well as calculate the associated ratios.

The ‘Management Statement’ and ‘Management Discussion & Analysis’ of the AR are of great significance. As an investor or potential investor, I devote particular attention to these sections as they provide insight into the company’s management’s opinion on their business and the sector overall. 

The ‘Management Statement’ (frequently referred to as the Chairman’s Message) can provide valuable insight into the mind of the leading figure in the business. Usually, this encompasses wide topics and shows what position the organisation is taking. When I evaluate this part of an analysis, I am particularly keen to spot whether the management is level-headed and candid while discussing wins and losses.

I distinctly recall reading through the chairman’s message about a long-standing coffee manufacturing firm. According to him, the company had experienced a revenue surge of almost 10%. Nevertheless, their statistics suggested that it had only grown by 4-5%. Owing to this discrepancy in numbers, I realised that the leader of the company wasn’t probably aware of the facts on the ground, and ultimately I decided against investing. Looking back now, it seems reasonable that I didn’t stake money in that venture.

Progressing, the following area is ‘Management Discussion & Analysis’ or ‘MD&A’. I believe this to be one of the most essential sections in the Annual Report. Commonly, firms begin this segment with an overview of macroeconomic trends in the economy. 

They delve into overall economic activity domestically and how businesses across many industries are feeling. Companies that have a more extensive overseas presence additionally consider global economics and business sentiment.

ARBL has both exports and domestic interests, so they consider both the global and local markets when creating their Annual Report. See the snapshot below:

ARBL’s view on the Indian economy:

Afterwards, the corporations usually reference industry trends and their outlook for the upcoming year. This is significant because we can gain insight into what dangers and openings the company sees in the field. Most significantly, I analyse this part of the report and compare it to those of other similar firms to determine if the organisation has an edge.

If I have an interest in Amara Raja Batteries Limited, I would examine both their Annual Report (AR) and the Annual Report of Exide Batteries Limited.

The previous section of the Management Discussion & Analysis was mainly comprised of broad and general overviews (like the global economy, domestic economy, and industry trends). From here on, though, the company will start discussing details pertaining to its business, like how its different departments are doing versus the previous year, performance numbers and more.

This is a brief overview of the same:

Companies discuss their guidelines and strategies for the year ahead across the various verticals; here’s a snapshot to illustrate.

Once the ‘Management Discussion & Analysis’ has been reviewed, a range of other reports are presented in the annual report. These may include Human Resources, R&D and Technology. Each piece of data is of importance when investing in an industry and should be taken into context. 

For example, if one were to study a manufacturing company’s annual report, it would be highly beneficial to analyse their human resources report – identifying any labour issues that could lead to potential factory closure, which is not something desired by shareholders.