Reading Annual Reports

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There is a particular format in which an annual report is prepared. Yesterday I was reading the annual report of Indigo & Asian Paints and I came to notice this fact.

I compared the two annual reports side by side and came to know that there is a format of preparing annual reports.

I am glad that I found that because it makes it easy to read and understand about any particular company and it has also mitigated the intimidation that I used to get by the very thought of reading an annual report.

First, there is a general overview of the business that a company does. This section includes the chairman’s letter, management discussion and analysis, pictures of the board of directors, key management and a list of products and services that a company offers. All of this information is printed on fine glossy paper.

This section also has a lot of pictures of various awards and recognitions that a company has received as well as various social works that the company did.

Second, there is a statutory report which has sub-sections like board’s report, corporate social responsibility report, business responsibility report, corporate governance report etc.

The board’s report includes a lot of annexures. There is particular annexure which gives extremely useful information and that is called ” Form MGT 9″.

This Annexure gives information about when was the company incorporated, what is the main business of the company, where is its headquarters, a detailed list of all the subsidiaries, shareholding pattern, change in the shareholding pattern of promoters and a lot other useful information.

This second section contains only about 40-50% useful information and rest of it can be skipped.

Third there is the financial section. This is the most important section as it gives the actual finanical health of the company.

First there is standalone statements then notes associatioed with standalone statements. Then consolidated statments and notes associated with that too.

It is important that you always read consolidated statements which also takes all the subsidiaries into account and gives the real picture about a company. Skip the standalone and read the consolidated.

(As standalone is printed first, I often happen to read standalone statements by mistake and kick myself when I reach the consolidated statements)

Most annual reports end after the notes to consolidated statements but some may also have a little section giving information about the upcoming Annual General Meeting or AGM)

And that is pretty much all an annual report contains. It is the most useful and important document to get information about any company and also about the industry in which that company operates. You will get to know a lot if you read an annual report cover to cover. I am glad that I did!

An awful lot of people ignore this substantially important document and toss it into dustbin. You can’t become a great investor by not reading annual reports in fact you can’t even become a decent investor. I am sure Warren Buffett reads a lot of Annual Reports.

Thanks for reading and have a great day!

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