What is an Annual Report?
The annual report (AR) is a yearly publication by the company and is sent to the shareholders and other interested parties. The annual report is published by the end of the Financial Year, and all the data made available in the annual report is dated to 31st March. The AR is usually available on the company’s website (in the investor’s section) as a PDF document, or one can contact the company to get a hard copy of the same.
Since the company’s annual report, whatever is mentioned in the AR is assumed to be official. Hence, any misrepresentation of facts in the annual report can be held against the company. To give you a perspective, AR contains the auditor’s certificates (signed, dated, and sealed) certifying the sanctity of the financial data included in the annual report.
Potential investors and the present shareholders are the primary audiences for the annual report. Annual reports should provide the most pertinent information to an investor and communicate its primary message. For an investor, the annual report must be the default option to seek information about a company. Of course, many media websites claim to give financial information about the company; however, the investors should avoid seeking information from such sources. Remember the information is more reliable if we get it to get it directly from the annual report.
Why would the media website misrepresent the company information you may ask? Well, they may not do it deliberately, but they may be forced to do it due to other factors. For example, the company may like to include ‘depreciation’ in the expense side of P&L, but the media website may like to include it under a separate header. While this would not impact the overall numbers, it does interrupt the overall sequencing of data.
What to look for in an Annual Report?
The annual report has many sections that contain useful information about the company. One has to be careful while going through the annual report as there is a fragile line between the company’s facts and the marketing content that the company wants you to read.
Let us briefly go through the various sections of an annual report and understand what the company is trying to communicate in the AR. For the sake of illustration, I have taken the Annual Report of Amara Raja Batteries Limited, belonging to Financial Year 2013-2014. As you may know, Amara Raja Batteries Limited manufactures automobile and industrial batteries. You can download ARBL’s FY2014 AR from here (https://www.amararajabatteries.com/Investors/annual-reports/)
Please remember, this chapter’s objective is to give you a brief orientation on how to read an annual report. Running through every page of an AR is not practical; however, I would like to share insights into how I would personally read through an AR and understand what kind of information is required and what information we can ignore.
To better understand, I would urge you to download the Annual Report of ARBL and go through it simultaneously as we progress through this chapter.
ARBL’s annual report contains the following 9 sections:
- Financial Highlights
- The Management Statement
- Management Discussion & Analysis
- 10-year Financial highlights
- Corporate Information
- Director’s Reporto
- Report on Corporate governance
- Financial Section, and
- Note, no two annual reports are the same; they are all made to suit the company’s requirement keeping in perspective the industry they operate in. However, some of the sections in the annual report are common across annual reports.
- The first section in ARBL’s AR is the Financial Highlights. Financial Highlights contains the bird’s eye view on how the company’s financials look for the year gone by. . The information in this section can be in the form of a table or a graphical display of data. This section of the annual report generally makes a multi-year comparison of the operating and business metrics.