Annual reports of companies can help you make investment decisions

It is that time of the year when annual reports of companies find their way to investors by e-mail or snail mail, or both. Average investors , however, pay very little attention to the reports, which are the most critical and exhaustive communication from companies to their investors. In most cases, the fat reports are disposed of with old papers, without being opened, or are consigned to the recycle bin if they are received by email. According to investment experts, this is not the best practice for smart investors. An annual report can tell you a lot about the company you have invested in: it will inform you how the company has performed in the year that has gone by and offer some idea about the direction it is headed in the coming year or near future.

In fact, for an average investor, the annual report is the only financial document they get from the company. Sure, one would have tracked news about the company on television or newspaper. Or read experts' take on the quarterly results of the company. However, the fact remains that the annual report is the only document the company is obliged to send to its shareholders. "It is said the devil is in the details. When one selects stocks, in addition to looking at the business, management and valuation, one needs to take a close look at things in the annual report - balance sheets, income statements and cash flow statements," says Sudhakar Shanbhag, chief investment officer, Kotak Life Insurance.

DON'T GO BY PHYSICAL APPEARANCE

Don't be fooled by the design, look and feel of the annual report. Companies are free to design annual reports in any way they want. There is no rule that specifies the number of pages, the shape or size, or the quality of production and so on of an annual report. While some balance sheets are thick and run into hundreds of pages, some may be lean. Some companies come up with plain vanilla annual reports with simple fonts, and pay little attention to page layouts and displays, while others use high quality paper and lay great emphasis on design to ensure that the annual report is pleasing to their shareholders.

"Investors should never get carried away by the physical appearance of the annual report. They should rather focus on how much information it contains," says Daljeet Singh Kohli, head of research, Indianivesh Securities.

MANAGEMENT DISCUSSION AND ANALYSIS

While you savour those glossy pages, don't get enamoured by them. What matters are the details in the section where the company shares its views on the direction the company plans to take, how it thinks the year ahead is going to be for the industry and how the company will fare - in short, things that will help you remake investment decisions.

While there are some companies who do have meets and conference calls for analysts regularly, some others are not so forthcoming. For example, some multinational companies share very little with analysts even if they are kind enough to convene an analysts'meet.

Source: Economic Times

Thanks and Regards,
Sanchari Sinha,
Intern at DENIP Consultants Pvt. Ltd.