5. All You Need to Know About Annual Reports

Curated By
Santosh Pasi
Options Trader and Trainer, SEBI registered Research Analyst

Skills takeaway

  • What are annual reports?
  • Components of annual reports and their relevance
  • How to analyse annual reports?
  • Where can you find them?

Imagine a world where there was no communication between the ownership and management of widely-held public limited companies. A world without annual reports. Unthinkable, right? This is because annual reports not only give a detailed commentary on a company’s performance during a financial year but also give hints about its future.

Let’s look at what some legends said about annual reports:

legends-about-annual-reports


Why are annual reports so important?

Today, there are various avenues for shareholders and investors to keep abreast of a company’s goings-on. However, there was a time when access to information was limited. Annual reports acted as windows to companies as they gave a lowdown of their financial activities over one year. Even today, despite multiple avenues of information, this document is regarded as the most reliable and exhaustive.

The importance of annual reports can be gauged from the fact that they are referred by shareholders, potential investors, analysts, government departments, regulators, rating agencies and bankers for various purposes. An annual report gives valuable insights into financial and non-financial information about the company. Above all, the information provided in the report is verified and certified by a third party, which adds credibility.

Over the years, the contents of the annual reports have evolved, partly due to regulatory and statutory requirements and because corporates have realised the significance of this report as a reliable means of communication with the outside world.

Here is an example of how the annual report of a leading pharmaceutical company evolved from 2006-07 to 2020-21:

 

 

annualreports2021

What constitutes an annual report?

Since annual reports cater to a wide audience, they usually contain more than just financial information.

Communication from the company head: Though not statutorily mandatory, such communication is important as it throws light on the company’s achievements and the challenges it faced from an authoritative figure. This also gives clues about what lies ahead for the company. For example, Warren Buffett’s letter to shareholders of Berkshire Hathaway is considered as important as the financial statement of the company.

Directors’ Report, Management Discussion and Analysis: The Directors’ Report usually contains information such as challenges encountered by the company, measures taken by the management to tackle them, expansion/diversification plans, and any other major steps taken that may have an impact on future revenue.

Auditor’s Report: This contains the auditor’s opinion about the compliance of the generally accepted accounting principles and pinpoints deviations and misrepresentations of facts.

Financial Statements: The Balance sheet, P&L Statement and cash flow statement are the heart of an annual report as they lighten a company’s performance in numbers. They give a clear picture of where the company is at the end of the year.

Notes to financial statements: They provide information about the company’s accounting policies and supporting details/interpretations of the items appearing in the balance sheet and P&L account. They are also important as they contain some off-balance sheet items that have an impact on current and future operations.

Related party transactions: If a company has transactions with a related party (as defined in the Act), during a financial year, it is mandatory to disclose the nature of such transactions. Details such as amount, outstanding balances including commitments, provision for doubtful debts, and expenses recognised in respect of bad and doubtful debts need to be provided.

Corporate Governance Repo

rt: This report contains non-financial information such as rules, practices and processes that ensure the company’s affairs are managed in a fair and transparent manner. The report varies from company to company.

An annual report should also contain a Business Responsibility Report and Secretarial Audit Report depending on the size of the company. Further, companies provide additional information on their own for readers to have a better understanding of their performance.

Where can you find annual reports?

Annual reports are the lifeline for fundamental analysts, without which they cannot form an opinion about the company. This document is freely available, thanks to statutory requirements and communication technology.
In most cases, you can find the company's annual reports on their respective websites under the ‘Investors’ section. Alternatively, you can find them on the websites of stock exchanges (NSE or BSE). In fact, it is always easier to find annual reports on the websites of stock exchanges.

A guide to finding annual reports online:

Points to remember:

  • You need annual reports while planning to invest in a stock or monitoring a stock as part of your portfolio
  • If analysing a stock for the first time, it is advisable to go through annual reports of at least five years
  • This helps investors arrive at well-informed conclusions
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