Reading an Annual Report Simplified

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What is an Annual Report? What is its significance?

An annual report is a comprehensive report of the preceding year of a company’s financials and its operations. It also states the current financial status of the company and future plans. It is the most important means of communication between the company and its stakeholders.

The significances of an annual report are:

  1. Accountability
    Annual reports are made and published to keep the accountability of the company towards its owners. The main motive of publishing an annual report is to propagate the mechanism of accountability. It states to what extent the company is liable for its operations.
  2. Decision Making
    It is one of the most important mediums on which investors make decisions to invest in a company. It also facilitates the company to decide about their future plans and objectives. The management and administration can make certain decisions which could be beneficial for the company depending on the reports. It gives a summary of the operations and financials of the company which also helps the stakeholders take decisions about their share in the company’s ownership.
  3. Attracting and Retaining employees
    There are employees who seek to have a safe and secure job. This becomes quite essential and the prospective candidates who want to be selected in the company tend to go through the financials of a company to ensure that they are not working in a company who does not provide with the requirements of the employee. The existing employees also check the annual reports to analyse and conclude on remaining in the company or not. The annual report also states the benefits that the employees would be getting from the profits earned by the company.
  4. Building customer relations
    The annual report helps the customers to know about the status of the company. It helps the customers to know the credibility of the company in terms of the quality of services and goods. It acts as a medium of communication between the customers and the company.

How to read an Annual report?

To read an annual report we need to go through all the components of the Annual report and understand what they are indicating.

Components of an Annual report.

  1. Letter from the chairman
    It states that how the company has performed in the preceding year. It also apologizes if the expectations and the targets are not fulfilled as per planned. The goals and objectives of the company are led down in this section of the report.
  2. Ten-year summarized report
    The company generally keeps a report of the last 10 years of their financials so that they can measure the growth trends of the company with the industry they are in. This also helps the company to rectify the areas where it in incurring losses and increase their productivity in order to earn profits.
  3. List of Directors and other officers
    This is the section where the list of the important members of the company are stated including from the president, CEO, CFO, CTO, COO, directors and many more. It helps the readers to know about the people who are on board. This, at times, attracts investments from the investors.
  4. Management Discussion and Analysis
    This is the section of the report where the management states about the financial status of the company. They also state the SWOT analysis for the company which would help the company to increase its efficiency and identify the strengths and weaknesses. This section also compares the industrial growth with the company growth and states how much the company is in conformity with the industry. It states about the finances of the company which helps the management to take future decisions and actions.
  5. Director’s Report
    This section states about the events that has been carried out by the company in the reporting period including its operations and financials at the same time. It also states about the company’s new ventures and partnerships with the other business. Basically, it shows the recap of the reporting period under consideration.
  6. Corporate Information: Brands, Subsidiaries and Addresses
    It states the different product lines, contacts, foreign and domestic company locations. This helps the readers to know where the production house is located and the different product lines.
  7. General Shareholder’s Information and Corporate Governance
    This section states all the relevant information which concerns the shareholders of the company. It also provides data regarding board meetings as to how many directors attended how many meetings. It also provides general shareholder information such as correspondence details, details of annual general meetings, dividend payment details, stock performance (stock history, stock price trends, listing stock exchanges), details of registrar and transfer agents and the shareholding pattern.
  8. Financial Statements
    This provides the financials and the operational information of the company. It is quite important to know the financial position of the company. The footnotes of the Income Statement, Balance Sheet and Cash Flow Statement are equally important as it shows to what extent the company is liable for the losses and profits incurred or earned respectively.
    a) Profit and loss statement
    It summarize the profits and losses earned or incurred respectively during the reporting period. It gives the clear picture of how much profits can be given out as dividend or as ESOP.
    b) Balance Sheet
    It gives the summary of the assets and the liabilities as on last date of the previous fiscal year of the company.
    c) Cash Flow Statement.
    It states the amount of cash earned by the company and used up by the same during the reporting period.

Analysing the Annual Report

After reading the different components of the Annual report, one needs to analyse the report and draw conclusions to it. The most effective ways of analysing the reports are:

  1. Identifying the economic conditions of the industry in which the company is in. It would also help to compare how much the company is deviating from the industrial averages
  2. Identifying the strategy of the company is an important tool of analysis. This tells the investors that what will be there money used for in the company.
  3. Analysing the risk and probability of contingent losses and making provisions for them.
  4. Determining the value of the company.

Conclusion

One needs to go through all the components of the annual report to take better decisions and have the idea about the objectives of the company. It gives an idea to the investors that what would be the returns on investment from the company. Also, the employees know more about their own company. It develops customer and supplier communication and gain their confidence in the long run.

Author | Shohom Pal