According to The Economic Times, the annual report of a company is an important document aimed at the informational needs of a company’s stakeholders, potential stakeholders, creditors, customers, suppliers, economists, financial analysts etc. However, many economists believe that investors do not make use of the annual report of a company properly before making an investment decision. According to analysts, the reason may be the lack of knowledge among the potential investors on how useful the annual report could be for their future investment decisions.
The annual report is usually prepared with minimum industry jargon and with good illustrations depicting the balances and trends on the company. It provides the readers the company’s vision for the future and the promises made by the management for the coming year. However, there is no fixed structure for an annual report and therefore the annual report of one company may vary considerably from the annual report of another company.
When reading the annual report, citing industry experts, The Economic Times advise reading the management discussion section along with the analysis as the first step. This shall give a broad idea as to the vision of the management and the strategies they hope to make use, in order to promote the company in a competitive business. It may also provide vital information for benchmarking the company for a broader understanding of its ability to sustain in a competitive business environment.
Also according to the Economic Times, the next important section is the financial statement, which includes the balance sheet, profit and loss accounts as well as the cash flow statement. One should also look at both the individual accounts as well as the consolidated accounts of the company when the annual report contains information pertaining to multiple subsidiary organizations.
The Economic Times also highlights the auditor’s report as another important area in an annual report, which will help the investors to recognize “if there are any qualifications or issues of materiality which can impact the company’s reported picture”.
The section, which deals with the board of directors and the management profile of the company, should also shed light to the potential of the company as well as the path it may take in the coming year.
However, when going through an annual report of a company, the reader can rather easily lose focus on the important information related to future investment decisions. This is simply because of the attractive presentation and the glossy print. Thus, in order to get the most out of reading an annual report, one needs to have a good understanding of the relevant market and its key players. At the same time, one should not base an investment decision solely on the company’s annual report, but also refer other documentation, which should give more information related to its financial performance.