Categories
Stock Analysis

4 Important section of the annual report for stock selection

Annual Report

What is the Annual report?

The annual report is a single most important resource to know about the company’s operation and performance within a year.

It is one of the most important tools for an investor to understand the current situation of the business.

Common sources of Annual report

Both paid and free source can get the annual report. The paid source is the most authentic one, but it is not like that free source is less genuine than the paid source. However, the paid source covers more details than the free one.  

Let’s discuss some free and reliable sources to get a free annual report. These are:-

  • Company website
  • Stock exchange website
  • Financial website

1. Company Website

The simple way to check the company profile is to visit its website, which is one of the first steps for an investor. It is also a free source to get the annual report.

It is not a choice of a company to decide the annual report should lie on its website or not. If it inscribes in a stock exchange, then they have to maintain an” investor relation or investor zone section” in its website to download the annual report.

The investor section is not only the source of the annual reports. Moreover , an investor can get the quarterly report of a company.

The steps to download the annual report from the company’s website are described by taking an example of GAIL. These are:-

  • Open the website (https://gailonline.com/#
  • Click on investor relations at the top in the menu bar 
  • Under the investor relations tab, click on “annual report”
  • The PDF file is available in the “annual report” tab to download the annual report of the fiscal year.

Annual Report

2. Stock Exchange Website

The company which is publicly traded in the stock exchange has to share its annual report to the stock exchange.

Subsequently, this allows an investor to get the annual report from the stock exchange website.

Here, the steps are described to download the annual report from the stock exchange website with an example of Reliance. These are:-

  • Open the website (www.nseindia.com)
  • At the top in the search bar, type Reliance and click search. 
  • It will take it to the next page with the information about the Reliance.
  • Click on corporate information and select Annual report
  • In the left bar, click on download the report

Annual Report

3. Financial Website

The financial websites save the data about the companies which are trading at the stock exchange. Thus, it is an important source to get the annual report of a company.

Here, the steps are mentioned with an example of Reliance. These are:-

  • Open the website “ www.moneycontrol.com”
  • At the top, in the search tab, type Reliance and click search.
  • It will take to the next page with the information about the Reliance
  • Click and download the annual report in pdf file format. 

The 4 important sections in the annual report

The annual report is indeed a big book that comprises over 200 pages stuffed with technical language, tables and detailed footnotes.

The initial pages are full of bright pictures and with full of positive notes, but the major section comprises 4 parts. These are:-

  • Corporate overview
  • Management review
  • Governance
  • Financial statement

1. Corporate Overview

It is the first section of an annual report which summarizes the company and covers the details such as

  • Company information 

This helps to understand the company’s profile with its aim, vision and mission of a company.

  • Business model

A company cannot sell their products or services to the target customers until it doesn’t have the business process, practices and policies. Not to mention, an investor can know about the business model from this section.

  • Major Products

The core product line of a business which contributes maximum to the turnover of a company is known as major products. Therefore, the company is mainly involved in the development and marketing of these products.

  • Board of Directors

It is important to know about the group of people who defined a set of policies for the welfare of a company. Thus, such a group of people are on the board of directors

 In summary, this section helps the investor to know about the company’s product and business model to see their growth is sustainable or not.

Thus, if an investor is convinced about the future growth of the company for over 10 years, then it is a good decision to invest in a company.

There are examples which prove that regardless of being an established company, they went to smash as they were not ready to adopt the new and advance technology. For example. Kodak and Nokia.

2. Management Review

This section is well known by its second name, the “Management’s discussion and analysis section”.For that reason, the management shares its view on the company’s performance.

They highlight the key points such as-

  • The global and domestic economic impact on their business 
  • An overview of business performance in a financial year
  • The financial health of a company
  • Key Strategic risks

In brief, the management describes the performance of their major business segments by highlighting the strategic and competitive strengths of their products.

3. Governance

Since the board of directors plays an important role to form the set of rules and policies to prolong business integrity. Consequently, they regulate the policies to follow the right practices for the conduct of business. Such a set of rules and policies comes under corporate governance.

In order to make the rules and policies top class, they are designed to follow the national and global standards like ISO 9000, ISO 14000, OHSAS 18000.

Moreover, the board of directors appoint the internal and external audit agencies to carry out audit/evaluation to check the practices followed by a company are right or not. 

4. Financial statements

It is a formal report that gives a true and fair view of the financial position and performance of a company by means of the income, cash flows and changes in equity of the company.

The financial statements comprise four independent statements. These are:

i) Balance Sheet 

The best way to check the financial health of a company in terms of assets, liability and equity for a period is by studying the balance sheet of a company. However, one cannot rely on the balance sheet to see the income and expense of a company 

ii) Income statement

It is also popularly known by its second name “Profit and loss statement”. Therefore, it shows the company is in profit or loss by means of their total earnings and expenses in a fiscal year.

iii) Cash flow statement

Cash flow plays a major role in the company’s success. Thus, if the company is having good cash flows to operate, investing and financing activities over a stated period, then the chances of their success are much higher compared to the company with the poor cash flow.

iv) Statement of changes in equity

It shows the change in equity balance at the end of the financial year. Either, it can be positive or negative depending upon the increase or decrease in the number of shareholders respectively. 

In brief, the financial statements are important tools to check the health of a company at a point of time.

How to check the authenticity of the Annual Report?

The annual report is the best way to know about the company’s performance and position, but what if the provided detail is not correct? To avoid such circumstances, it is always better to authenticate the information.

It is possible to check the authenticity of an annual report with the help of checking two parts. These are:- 

i) Executive sign-off 

The top executives such as the CEO and CFO of the company check every detail in the books and records to verify that they are accurate.

2. Auditor’s Report 

The company’s internal or external auditor’s team assured the details are accurate through their check mechanism.

Conclusion

The annual report is the best gift for the investor to know everything about the company.

The only effort demands from the investor side are to read a full report which comprises over 200 pages. It is difficult, but this practice leads to an investment decision more firm and correct.

In the end, a famous quote by Warren Buffett to show the importance of the annual report.

Annual Report

 

2 replies on “4 Important section of the annual report for stock selection”

Leave a Reply

Your email address will not be published. Required fields are marked *