An annual report is probably amongst the most viewed publications issued by a company. It is the most comprehensive means of communication between a company and its shareholders. It is a report that each company must provide to every shareholder at the end of the financial year. To put it differently, an annual report is one that each shareholder must read.

But what is its use if one does not understand or refer to it?

As a shareholder of a company, you need to know its performance over the past financial year and the management's view on the same. You also need to know what the company's future plans and strategies are. As a shareholder, you need to know what the management intends to do to attain such targets.

In the third part of this series, we present to you a brief on the key constituents of an annual report.

Key constituents of an annual report

Director's report: The director's report comprises of the events that take place in the reporting period. This includes a summary of financials, analysis of operational performance, details of new ventures and businesses, performance of subsidiaries, details of change in share capital and details of dividends. In short, shareholders can get a gist of the past year from this section.

Management discussion and analysis (MD&A): More often than not, the MD&A starts off with the management giving its view on the economy. It is then followed by a perspective on the sector in which the company is present. Any major changes like inflation, government policies, competition, tax structures, amongst others are highlighted and discussed in this report. This section also includes the business strategies that the management intends to follow. Details regarding different segments are provided here as well. The company also gives a brief SWOT (strength, weakness, opportunity, and threat) analysis and business outlook for the coming fiscal.

Reading this section can aid a shareholder to understand what major changes are likely to affect the company going forward. However, as mentioned earlier, an investor should not blindly believe what the management has to say. While it tends to paint a rosy picture (in most cases), one needs to judge the sanity behind the rationale.

Report on corporate governance: The report on corporate governance covers all aspects that are essential to the shareholder of a company, but those which are not part of the company’s daily operations. It includes details regarding the directors and management of a company. These include details such as their background and their remuneration. This section also provides data regarding board meetings - how many directors attended the how many meetings - and so forth. It also provides general shareholder information such as correspondence details, details of annual general meetings, dividend payment details, stock performance (in comparison to the Indian stock market), details of registrar and transfer agents and the shareholding pattern.

Financial statements and schedules: Finally, we arrive at the crux of the annual report, the financial statements. Financial statements, as you are aware, provide details regarding the operational performance of a company during the reporting period. In addition, it also depicts the financial muscle of a company. The key constituents of the financial statement include the profit and loss account, the balance sheet, the cash flow statement and the schedules.

In the next article, we shall briefly take a look at the key constituents of the financial statements. Thereafter, we will go through each of the statements in further detail.

Equitymaster.com

How to evaluate depreciation and interest costs of a company

Do all dividend paying companies make a good investment