How to read annual report | Important sections to look for!

What is an
annual report?

Annual report is a public document
issued by the company at the end of every financial year which contain the details of the company with respect to the business model, the financial
statements and many more. We will be breaking down “How to read annual report”
in much detail in this article.

Annual report is audited by the
independent auditors appointed in the annual general meeting and thus the
information provided in these documents is assumed to be “true and fair”. Any
discrepancies or misleading information in annual report is considered as a
severe offence which can go against the company. 

Annual report is issued by the
company to the shareholders and other people who have interest in the company’s
business such as creditors, bankers, potential clients and shareholders, etc
(also known as stakeholder). Annual report of all the past financial years can
be found on the company’s website under the “investor relation” section. These
documents are very useful as it gives insights into the business and where does
the company stand as compared with its competitors.

Important
sections in an annual report:

While annual reports are reliable and
trustworthy but certain companies try to manipulate it by adding a lot of
marketing content, which has no relevance and hence an individual investor
should be aware of what sections are relevant to him and should not fall for the marketing trap.

In order to make this article more user
friendly, we will review the annual report of the company “Huhtamaki PPL Ltd.”
(You can download the same by clicking here) 

A company usually starts with disclosing
some important financial numbers such as revenue and profit for the year and
also introduces the investor with some of their most popular products of the
year, if any. It gives a fair understanding of the business products and how
well they performed with respect to sales, profit and market share.

Below is the snapshot of Financial
highlights from Huhtamaki PPL (AR Pg. 20)

This section tells us about the decisions made by the company in the previous
financial year and their impact in the future. The director conveys his message
about the company’s vision, performance, projects and much more with the
shareholders.

Below is
the snapshot of Director letters from Huhtamaki PPL (AR Pg. 22)

This is
one of the most important section as it gives the overall picture of the
company. The section usually starts with an introduction and business model of the
company. It gives detailed information about the industry in which the company
operates and the growth outlook for the overall industry. If the company
operates in the international market, the section would also mention the global
economic outlook which can impact the industry. It talks about all the recent
developments, exports, initiatives, tax implications, development of the
economy, risk in the business, etc. 

(This section teaches a lot of stuff which an
investor need, it is so powerful that if we read this section of three to four
companies who are in the same industry then we could be an expert of that
industry.) 

Below is
the snapshot of MD&A  from
Huhtamaki PPL (AR Pg. 22)

These
section gives detail about the company’s key managerial personnels, bankers,
auditors, registered offices and headquarter address, research and development
centres, etc. It also provides information about the subsidiaries and the company’s
share of interest in those subsidiaries. (You may also check the corporate
governance section to get detailed information about the promoters and board of
directors)

Below is
the snapshot of Corporate Information from Huhtamaki PPL (AR Pg. 125)

This
section discloses the total shareholding of Promoters, Domestic
Institutional Investors (DII), Foreign Institutional Investors (FII), Retail
investors and others. (Lower promoter’s shareholding is a sign of concern.)

Below is
the snapshot of Shareholding pattern from Huhtamaki PPL (AR Pg. 65)

This
section tells us about the remuneration/salary paid to the directors and KMP
and also let us know what is the ceiling as per the act for the salary payment,
basically, the ceiling set by companies act is 10% of net profit, usually the
company’s pay salary around 4 to 5% of net profit. It also talks about the
amount paid to the board of directors and committee members for attending board
meetings, it should not be too high which could indicate something fishy going
on in the company. (For example, One crore per meeting is not justifiable)

Below is
the snapshot of Remuneration from Huhtamaki PPL (AR Pg. 51)

Last but
not the least, the financial information is one of the most important and
crucial aspect of any business and is very important to analyse this section.
It contains three financial statements:-

a.       The profit and loss statement

b.       The balance sheet

c.       The cash flow statement

If the company has multiple subsidiaries and all of
them are into the same business then one should look at the consolidated
financial statement and if the company does not have any subsidiary or have
subsidiary but they are into some different businesses than in such case one
should look at standalone financial statements. 

Keeping the above point in mind we should always
analyse the consolidated figures as it gives the overall picture of the
company’s business. In our next article, we will be discussing in detail about
all the three financial statements and how to understand which line items are
the most important and what are the signs of a fundamentally strong company?

Below is the snapshot of Financial statements from
Huhtamaki PPL (AR Pg. 84)

These are
the liabilities which might or might not occur in the future. For example, If there is some ongoing lawsuit against the company, and if lost, the company might have to pay a huge chunk of penalty,
income tax dues, sales tax dues, etc. Such liabilities are not shown on the balance sheet. They have a separate segment to disclose contingencies.

These are some of the important sections
one should keep in mind while analysing or reading an annual report. There are different perspectives of every individual to look at it. This was just an
overall and a simplistic example on “How to read annual report”. The more you
read the more you understand, as I have mentioned above pick up an industry and
try to read the annual reports of different companies of the same industry, as
you will move forward there will be lots and lots of learning and eventually, you would be able to pick up the best companies. Each of the sections will be
covered in detail and we will let you know how to analyse the above sections part
by part in our upcoming “Fundamental Analysis Series”. (We will attach the links as and when
updated) 

Till then don’t forget to check our most popular post “12 Pointers Checklist to pick a Multibagger Stock”.

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