Annual reports are the primary source of data about the company’s financial position, shareholders, strategy discussion, Market opportunity and their initiatives over their upcoming products or service launches.
While some of them argue that annual reports of the companies might not be enough to understand the company’s investment thesis, we believe that Annual reports data would give enough information for an investor to make the investment decision.
Investors check list in Annual reports which could affect their investment decision about the company are:
· Management Discussion and Analysis: This is the key section for investors to look at the annual reports of the firm as they provide an overview of the company’s target industry trends, SWOT analysis as well as an overview of the major financial metrics of financial statements for the past three to five years. This section also covers the risk factors or concerns hurting the firm’s performance. By reading this section, you can get an overview of the target industry opportunity the company is operating in, how the company is positioning themselves with the changing market dynamics and what steps are they taking to have a competitive edge against their peers. Investors can also understand the region’s the company is strengthening their presence and their upcoming target regions to focus on. This section also gives an overview on the major Merger or acquisition that the group has performed. A series of acquisitions in a particular industry clearly indicates the company’s efforts to strengthen in that domain.
· Financial statements: Having a look at the financial statements is the basic requirement for an investor as its gives and overview about the profit and loss accounts (income statement), balance sheet as on year end, cash flow statement. This section analysis enables the investors to understand the financial health of the company. Checking GAAP and non GAAP numbers is also helpful. But investors need to check their accounting policy information on various practices like depreciation method, inventories, and liabilities as many firms have been altering these methods to show a better performance. Investors need to track these methods for the last five years and more as any change in accounting policy would be able to enhance the group’s revenues or profits, overall profitability, alter liabilities, transactions and many more. Tracking comments by auditors is also important other than the financials as understanding the auditors’ background, qualifications would help you judge the authenticity of the data report.There are many instances where firms with the help of auditors have done several malpractices in terms of showing inflated numbers to investors
· Director’s report: Director’s report is also another major section in the Annual report as this section also covers a brief overview about the company’s financial results, developments etc. Moreover, this section gives information on the company’s operational performance, capital expenditure, Pipeline, average revenue metrics based on the sectors. By tracking the last five years director report, investors will be able to understand whether the company reached their projected goals, management’s plans for the upcoming years. The tome of the director also helps you to understand the good and bad years of performance. By tracking previous director’s report, investors can understand whether the firm’s strategies helped them to get benefits or not.
· Corporate governance: Understanding the firm’s corporate governance is also necessary. Investors need to track the firms’ board of director’s background information. Also tracking the attendance of directors in board meetings and annual general meetings is also helpful as this could give an overview of the director’s involvements in making crucial decisions about a firm. Knowing remuneration paid to directors corresponding to the profits earned by the firms could help investor’s understand the moral of the director’s especially during the weak performance period of the firm. Other things include sub committees and attendance records of directors during meetings, whether the profile of independent directors is suitable to the company’s industry etc.
· Product and service offerings: This section gives an over view of the firm’s products or solutions for the last few years. Investors can also understand each division performance during the last few years, and accordingly analyze which division has been growing rapidly in terms of revenue, earnings before interest, tax, depreciation and amortization (EBITDA), profit after tax (PAT/Net income / loss). For the weak performing division’s investors need to understand the company’s efforts to revamp the growth efforts or whether the company is planning to divest or offload them.
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