Hello Investors, I have applied for Zerodha account, what are the main points you experienced investors look for in a company’s annual report? With respect to Longterm investment.
Here are the main points you should look for when reviewing an annual report:
- Financial Statements:
- Income Statement: Shows the company’s revenues, expenses, and net income over a specific period.
- Balance Sheet: Presents the company’s assets, liabilities, and shareholders’ equity at a given point in time.
- Cash Flow Statement: Details the company’s sources and uses of cash, including operating, investing, and financing activities.
- Management’s Discussion and Analysis :
- This section provides management’s insights into the company’s financial performance, operational results, and future prospects. Look for discussions about key drivers of revenue and expenses, challenges faced, and plans for growth.
- Business Overview:
- Understand the company’s core business operations, products, services, and market segments. This section should give you a sense of the company’s industry positioning and competitive landscape.
- Risks and Challenges:
- Companies are required to disclose potential risks that could impact their financial condition or operations. Pay attention to both industry-specific and general risks that might affect the company’s performance.
- Corporate Governance:
- Check for information about the company’s board of directors, executive compensation, and any changes in leadership. This section offers insights into the company’s governance structure.
- Financial Ratios and Key Performance Indicators :
- Analyze financial ratios like profitability (e.g., gross margin, net margin), liquidity (e.g., current ratio), and efficiency (e.g., inventory turnover). Also, look for Key Performance Indicators relevant to the industry.
- Auditor’s Report:
- Review the independent auditor’s report, which confirms the accuracy and fairness of the financial statements. Any qualifications or concerns raised by the auditor should be noted.
- Notes to the Financial Statements:
- These provide additional details and explanations for items on the financial statements. They can clarify accounting policies, significant transactions, and contingencies.
- Footnotes offer context and explanations for various elements in the report. Pay attention to any changes in accounting practices, significant events, or legal matters.
- Letter to Shareholders:
- The CEO or Chairman’s letter to shareholders often provides a high-level overview of the company’s performance, achievements, and future plans.
- Non-Financial Information:
- Increasingly, annual reports include information on environmental, social, and governance factors. This can include sustainability initiatives, diversity and inclusion efforts, and other non-financial metrics.
- Segment Information:
- If the company operates in different business segments, this section provides insights into how each segment contributes to overall performance.
…and after doing all that
then simply invest in an index ETF
and HODL for few years
without panic-selling one’s holdings at the first sign of any economic downturn.
Checkout this varsity chapter on how to read annual reports:
How to Read the Annual Report of a Company – Varsity by Zerodha
You will get an idea of what to look for in the annual report with the example.