What is an annual report?
Annual report is a public document issued by the company at the end of every financial year which contain the details of the company with respect to the business model, the financial statements and many more.
We will be breaking down “How to read an annual report” in much detail in this article. Annual report is audited by the independent auditors appointed in the annual general meeting and thus the information provided in these documents is assumed to be “true and fair”.
Any discrepancies or misleading information in annual report is considered as a severe offence which can go against the company.
Annual report is issued by the company to the shareholders and other people who have interest in the company’s business such as creditors, bankers, potential clients and shareholders, etc (also known as stakeholder).
Annual report of all the past financial years can be found on the company’s website under the “investor relation” section. These documents are very useful as it gives insights into the business and where does the company stand as compared with its competitors.
Important sections in an annual report:
While annual reports are reliable and trustworthy but certain companies try to manipulate it by adding a lot of marketing content, which has no relevance and hence an individual investor should be aware of what sections are relevant to him and should not fall for the marketing trap.
In order to make this article more user friendly, we will review the annual report of the company “Huhtamaki PPL Ltd.” (You can download the same by clicking here)
1. Financial Highlights
A company usually starts with disclosing some important financial numbers such as revenue and profit for the year and also introduces the investor with some of their most popular products of the year, if any. It gives a fair understanding of the business products and how well they performed with respect to sales, profit and market share.
Below is the snapshot of Financial highlights from Huhtamaki PPL (AR Pg. 20)
2. Director’s letter to shareholder
This section tells us about the decisions made by the company in the previous financial year and their impact in the future. The director conveys his message about the company’s vision, performance, projects and much more with the shareholders.
Below is the snapshot of Director letters from Huhtamaki PPL (AR Pg. 22)
3. Management discussion and analysis (MD&A)
This is one of the most important section as it gives the overall picture of the company. The section usually starts with an introduction and business model of the company.
It gives detailed information about the industry in which the company operates and the growth outlook for the overall industry. If the company operates in the international market, the section would also mention the global economic outlook which can impact the industry.
It talks about all the recent developments, exports, initiatives, tax implications, development of the economy, risk in the business, etc.
(This section teaches a lot of stuff which an investor need, it is so powerful that if we read this section of three to four companies who are in the same industry then we could be an expert of that industry)
Below is the snapshot of MD&A from Huhtamaki PPL (AR Pg. 22)
4. Corporate Information
These section gives detail about the company’s key managerial personnels, bankers, auditors, registered offices and headquarter address, research and development centres, etc.
It also provides information about the subsidiaries and the company’s share of interest in those subsidiaries. (You may also check the corporate governance section to get detailed information about the promoters and board of directors)
Below is the snapshot of Corporate Information from Huhtamaki PPL (AR Pg. 125)
5. Shareholding pattern
This section discloses the total shareholding of Promoters, Domestic Institutional Investors (DII), Foreign Institutional Investors (FII), Retail investors and others. (Lower promoter’s shareholding is a sign of concern.)
Below is the snapshot of Shareholding pattern from Huhtamaki PPL (AR Pg. 65)
6. Remuneration of directors and key managerial personal
This section tells us about the remuneration/salary paid to the directors and KMP and also let us know what is the ceiling as per the act for the salary payment, basically, the ceiling set by companies act is 10% of net profit, usually the company’s pay salary around 4 to 5% of net profit.
It also talks about the amount paid to the board of directors and committee members for attending board meetings, it should not be too high which could indicate something fishy going on in the company. (For example, One crore per meeting is not justifiable)
Below is the snapshot of Remuneration from Huhtamaki PPL (AR Pg. 51)
7. The Financial Statement
Last but not the least, the financial information is one of the most important and crucial aspect of any business and is very important to analyse this section. It contains three financial statements:-
a. The profit and loss statement
b. The balance sheet
c. The cash flow statement
If the company has multiple subsidiaries and all of them are into the same business then one should look at the consolidated financial statement and if the company does not have any subsidiary or have subsidiary but they are into some different businesses than in such case one should look at standalone financial statements.
Keeping the above point in mind we should always analyse the consolidated figures as it gives the overall picture of the company’s business.
Below is the snapshot of Financial statements from Huhtamaki PPL (AR Pg. 84)
8. Contingent liabilities and commitment
These are the liabilities which might or might not occur in the future. For example, If there is some ongoing lawsuit against the company, and if lost, the company might have to pay a huge chunk of penalty, income tax dues, sales tax dues, etc.
Such liabilities are not shown on the balance sheet. They have a separate segment to disclose contingencies.
These are some of the important sections one should keep in mind while analysing or reading an annual report. There are different perspectives of every individual to look at it.
This was just an overall and a simplistic example on “How to read annual report”. The more you read the more you understand, as I have mentioned above pick up an industry and try to read the annual reports of different companies of the same industry, as you will move forward there will be lots and lots of learning and eventually, you would be able to pick up the best companies.