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Analysing Annual Reports of companies

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Annual Reports are one of the best sources of information about the state of activities of a company.

It is a mandatory filing for every listed company.

The Annual Report gives detailed information as to what the company has done so far and what it plans to do going forward.

In most cases, the plans of the management for the next few years can will be either directly or indirectly be published in the report.

It is put before the shareholders at the Annual General Meeting (AGM) of the company for their approval.

The Annual Report will be a bulky document but it is a treasure of lot of information which is otherwise difficult to get from a single source.

Read the Vision and Mission Statements to understand what the company wants to do.

The Corporate Information section gives details of directors, bankers, auditors and registered and corporate office. Key things to look is designation of each board members, in case auditors are reputed they provide additional comfort to the company you are investing.

The Executive Statement of the document is a must read and gives a gist of the overall activity.

In some reports, a lot of historic information will be given which helps small retail investors get a perspective about the past activities of the company and as to how the compared fared till now.

An increase of debt levels of the company is not a good sign unless being supported and felt necessary.

Cash flow from operations is one number that investors will want to see.

In particular, the bulk of profit of the company should generally come from the cash of the operations.

While those who are illiterate in reading accounting numbers, one area of quickly picking inconsistencies is drastic change in numbers of one year compared to the previous.

The investor should know what lead to such a drastic increase or decrease in the numbers.

This is because, in general, most numbers should like a continuity.

The report is a good source of information about new products that will be introduced in the future, plans about starting new production lines etc.

Notice if the last year promise of increased sales started to get reflected this year because of the additional production line that was started last year.

Cautions investors should cross check the quarterly report numbers add up and get reflected properly in the annual report.

This is because sales numbers can be cooked to reflect future sales as being done in the present quarter but are shown as cancelled later.

Real Estate companies use different methods of showing sales numbers.

Sales and profit numbers need careful observation in particular.

Some companies pay less taxes that are not in sync with their net profits.

This is not a healthy sign in general.

As an investor, you should know why the company is enjoying lower tax outgo.

Find out the extent of tax disputes that the company has at various tax forums.

This is because companies show tax dispute amount as a contingent liability.

The Cash Flow Statement is one good tool that tells how the cash of the company is used.

Companies try to show balance sheet strength by not providing some possible liabilities. For example, the balance sheet of PSU banks will look totally different if all the non-performing assets (NPAs) were written off.

Similarly, the balance sheet of most PSUs will shrink significantly if one accounts for the possible pension liability in future.

Take a look at related party transactions if any. In general, too much of such activity is not a good sign because each of the party might be using the other to hide their work.

Remuneration paid to the Directors need a careful watch.

A remuneration of 5% or less of the profits is a generally a good sign.

The Auditor Statement is a must read. Most auditors give a fair view of the company and hence if the auditor raises any red flag, it is a possible sign of problem with the company.

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