WORTH READING

COURTESY - ECONOMIC TIMES
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It is that time of the year when investors start receiving the most
critical communication tool from the company, namely the
annual report. An annual report provides a summary of how
a company has performed in the year that went by, and how
it is likely to perform in the forthcoming year.

For companies, it is mandatory to send a hard copy of the
annual report to each and every shareholder. While a lot of
shareholders merely keep annual reports aside or throw them
away with old newspapers, there are important cues which
savvy investors pick.

In fact, for the general public, the annual report is the only
financial document that they get to see. Hence, for existing
shareholder, it could be the best source of information to
determine the financial health of a company and to learn about
any problems or opportunities in the business environment.

Here are some important things that you could look for
in a balance sheet.
Balance sheets can be designed in any shape and size. Also, there is
no mandatory rule which specifies the quality of paper to be used
in an annual report.

Hence, while some companies come up with a plain vanilla annual
report with simple fonts, simple colours and pay little attention to
page layouts and displays, there are companies which use
high-quality paper, take special efforts to design it and ensure
that the annual report is really presentable to their shareholders.

“How the annual report looks and feels conveys its image and
speaks volumes about the ability of a company to market itself
in the corporate world. Quality of paper used in the annual report,
many a time, is proportionate or signifies how well the company
is doing,” said Alok Churiwala, managing director, Churiwala Securities.

Sending the annual report by courier or speed post, as compared to
ordinary post, could denote how important an investor is for the company.

Management discussion and analysis
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This section is of prime importance for research analysts as well
as fund managers. It gives you an overview of the previous year
of operations and how the company performed.

Besides this, most importantly, the management shares its
vision for the coming year, updates on projects which are
in the pipeline and thoughts on future projects. However, investors
should keep in mind that unlike the numbers, this section is unaudited.

“Management discussion and analysis is very important to me in
case of multinational companies, where there is less communication
by way of conference calls or analyst meets during the year,” said
Anand Shah, head (equities), Canara Robeco Mutual Fund.
This section gives you important clues as to the direction in which
a company is thinking, how they think the year ahead is going to be
for the industry and how the company will fare.

Financial statements and strength of balance sheet
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Shareholders like to look at the income statement as it denotes
how the company is performing in its business, how much profit
the company is making and what is it earning from its core
operations. Portfolio managers and analysts are concerned
about the strength of the balance sheet.

“I look at things like inter-group loans, investments, cash and debt
position in the balance sheet prior to making an investment decision,”
said Vaibhav Sanghvi, director (funds management), Ambit Capital.

There are things like auditors qualification, or one-off expenditure
which raise a red flag and need to be considered further by analysts.
Then, there are things like cash flow statement which is sacrosanct
for most analysts.