Do you call yourself an investor when you’ve never read
an annual report? Annual reports are sent to shareholders at the end of every
financial year and published on the company website.It summarizes the
performance of the sector and the company.It is a ready reckoner of products, market share, and financial
situation of a company.Charlie Munger says," You must value the business
in order to value the stock".Annual reports help us to obtain clarity and
insight about the business and it's competitors.
The financial statement at the end of the report has three parts- the balance sheet, the income statement and the cash flow statement. The assets, liabilities and net worth of the firm are listed in the balance sheet. A company is called a fairly good business when it’s net worth has increased consistently over the years.Seeing a track record of double digit growth rate in company's networth is a positive sign. The balance sheet gives a clear idea about the capital, reserves, loans, permanent assets, current assets, long term and short term borrowings, etc. Income statement is about the net revenues, net profit and total expenses. Consistent rise in net revenues and profit attract the attention of investors.Money transactions, both in and out of the firm’s books, are listed under the cash flow statement. The ‘Cash Flow from Operations’ gives the amount of money earned from the sale of goods and services. Money from selling or buying of assets are listed under ‘Cash Flow from Investing’, and that from sale of shares or bonds, under ‘Cash Flow from Financing’. A company with a positive net cash flow over the years proves as a worthy investment. Otherwise, the consistency of returns are doubted.
An intelligent investor should not ignore a report section called ‘Management Discussion and Analysis’ . This is where the sector and the company are looked at together, considering all the qualitative factors,business model and future growth potential. “When others read the Playboy magazine, I read annual reports”, is a famous quote by the greatest investor of all times, Warren Buffett. This mindset differentiates market participants blindly betting, and intelligent investors.
Each annual report can be dismantled
into four pieces- the director’s report, the auditor’s report, financial
results and account notes. The director’s report describes the current economy
and the sector, spreading light on the firm’s activities, challenges faced,
opportunities to be tapped and future plans. Checking the information for flaws
and comparing with other firms in the sector is the job of the investor. Here,
reading between the lines is the rule.The law
requires the company to publish the auditor’s report. The company’s statements
are critically examined, with the stockholders’ interests in mind. Chances are
that a few of the director’s statements are despised, although not directly, in
the auditor’s report. Such discrepancies and accounting methods can be noted
from this part of the report.
The financial statement at the end of the report has three parts- the balance sheet, the income statement and the cash flow statement. The assets, liabilities and net worth of the firm are listed in the balance sheet. A company is called a fairly good business when it’s net worth has increased consistently over the years.Seeing a track record of double digit growth rate in company's networth is a positive sign. The balance sheet gives a clear idea about the capital, reserves, loans, permanent assets, current assets, long term and short term borrowings, etc. Income statement is about the net revenues, net profit and total expenses. Consistent rise in net revenues and profit attract the attention of investors.Money transactions, both in and out of the firm’s books, are listed under the cash flow statement. The ‘Cash Flow from Operations’ gives the amount of money earned from the sale of goods and services. Money from selling or buying of assets are listed under ‘Cash Flow from Investing’, and that from sale of shares or bonds, under ‘Cash Flow from Financing’. A company with a positive net cash flow over the years proves as a worthy investment. Otherwise, the consistency of returns are doubted.
An intelligent investor should not ignore a report section called ‘Management Discussion and Analysis’ . This is where the sector and the company are looked at together, considering all the qualitative factors,business model and future growth potential. “When others read the Playboy magazine, I read annual reports”, is a famous quote by the greatest investor of all times, Warren Buffett. This mindset differentiates market participants blindly betting, and intelligent investors.
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