Every listed company prepare Annual Reports and send it to the shareholders’ listed in the shareholders register in order that they can attend and vote in the Annual General Meeting of the company. The Annual Reports are reports on the financial and business performances of the companies during the year being reported. Usually, annual reports are bulky tomes and everybody dreads reading it, even the people from the finance background. But the Annual Report is essential reading for an investor. Most of us who own shares in listed companies forget the fact that we are part owners of companies and we need to know how the company we own has fared. This is your first guide on ” How to read Annual Reports of listed companies”
We need to know what to read in an Annual Report to get a gist of the company performance and for that, we only need to focus on the following:-
- Financial Statements
Under the financial statements, we need to look at the following:-
- Auditors Report – Here we need to find out whether the auditor has given a clean report or a qualified report. When the auditor gives a qualified report, it is generally a red flag and he gives the reason for the qualification which the investor should look into
- Balance Sheet – This statement gives the financial position of the company as on a given date. The investor should look at the working capital ratio or current ratio. The current ratio is arrived by dividing total current assets by total current liabilities. This ratio should be higher than 1 which means that the company is not using long term funds for operational requirements. The other thing to look in a Balance Sheet is the Debt equity ratio. Debt here represents total bank borrowings (both short term and long term) and equity represents total shareholder funds. This ratio should be less than 1 which means that the company is not highly leveraged.
- Profit and loss statement – This statement shows the financial performance of the company in a given period. The investor needs to focus on revenue and net profit. They should show an increase over the previous year.
- Cash flow statement – This is the most important statement for the investor. This statement has 3 segments – A. Cash flow from operating activities. B. Cashflow from Investing activities C. Cashflow from Financial activities
The investor should check whether the company generated cash from its operating activities and was there any free cash flow (FCF). FCF is arrived at by taking the total cash generated from operating activities and deducting from it the fixed assets purchased during the year. The Investor should be very happy when a company is generating FCF as this means that the company has surplus cash which it can deploy into the business without taking recourse to bank loans.
- Chairman’s report
This is a write up given by the Chairman of the company giving his perspective on the performance of the company during the year and his vision for its future. The report carries the name and photo of the person who is managing the company and it is very important for the investor to know his credentials
- Directors Report and Management Discussion and Analysis
This is a report provided by the key management of the company wherein they give their take on the economic outlook faced by the company during the year and how has been the performance of the various business units of the company. Both the financial and non-financial performance of the business units is discussed. The report will also highlight what were the challenges faced by the company and what steps it took to mitigate the same. The investor will get an idea as to how well the company was managed from this report.
- Financial performance highlights
This is a datasheet that will show the financial performance of the company over the last 5-10 years in a snapshot. The investor should look at the trend of revenue, Earnings before Interest, Depreciation and Taxation (EBIDTA), net profit, earnings per share (EPS), dividend per share, and return on equity. A rising trend on all these parameters indicates that the company is well managed.
Let me assure you that reading the above will not take more than an hour but in return, you as an investor will get valuable insights about the company you own and you will be more enlightened about the company than 95 % of the shareholders.
Please find enclosed the Annual Reports for Marico for 2019-20.
The points discussed above can be found in the following places:-
- Chairman’s Report-Page 15 provides the report of the Chairman Harish Mariwala
- Management Discussion and Analysis-Page 88 to 103
- Consolidated Financial Statements-Auditor’s Report is on Page 191 and refer to opinion paragraph
- Consolidated Financial Statements-Balance Sheet is on Page 198 wherein current ratio and debt-equity ratio can be calculated
- Consolidated Financial Statements-Profit or Loss is on Page 199 wherein income from operations and total comprehensive income for the year can be seen
- Consolidated Financial Statements-Cash flow is on Page 202 wherein net cash generated from operating activities as well as payment for property, plant and equipment, and intangible assets can be seen. Free Cash Flow (FCF) for 2019-20 as calculated is INR 1,094 crores.
- Financial Highlights-Please refer to the other annexure for financial highlights from 2011 to 2020. Income from operations has grown from INR 3,135 crores in 2011 to INR 7,315 crores an increase of 133%. Other performance parameters as discussed in the write up can also be checked in the annexure.