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Annual Report Reading

Fundamental Analysis

• Introduction
• Investor’s mindset
• Annual report reading
• P&L statement
• Balance sheet
• The cash flow

• The financial ratio
• Investment due diligence
• Equity research
• DCF primer
• Notes

learning sharks stock market institute

3.1 – What is an Annual Report?

Every year, the corporation publishes an annual report (AR), which is distributed to shareholders and other interested parties. The annual report is released by the conclusion of the fiscal year, and all the information it contains is current as of March 31. The AR is often accessible as a PDF document on the company’s website (in the investor area), or one can get in touch with the business to obtain a paper copy of the same.

Since the AR is the company’s annual report, everything stated there is taken as official. Any falsification of information in the annual report can therefore be used against the corporation. To put things in perspective, the audit report (AR) includes the auditor’s certificates, which are sealed, signed, and dated.

The major recipients of the annual report are current shareholders and prospective investors. The most important facts should be included in annual reports, together with the main message. The annual report should always be the first place an investor looks for information about a company. Of course, a lot of media websites make the claim to provide financial data about the company; however, investors should steer clear of these sources while looking for information. Keep in mind that information obtained straight from the annual report is more trustworthy.

You could wonder why the media website would distort corporate information. They might not be doing it on purpose, but they might be forced to because of other circumstances. For example, the company may like to include ‘depreciation’ in the expense side of P&L, but the media website may like to include it under a separate header. While this would not impact the overall numbers, it does interrupt the overall sequencing of data.

3.2 – What to look for in an Annual Report?

There are numerous areas of the annual report that provide insightful information about the business. When reading the annual report, one must exercise caution because there is a fine line between the company’s facts and the marketing material that the corporation wants you to read.

Let’s quickly go through each area of an annual report to better grasp the message the organization is attempting to convey. I’ve selected the Amara Raja Batteries Limited Annual Report from the Financial Year 2013-2014 as an example. Amara Raja Batteries Limited produces industrial and automotive batteries, as you may know. Here (https://www.amararajabatteries.com/Investors/annual-reports/), you can download ARBL’s FY2014 AR.

Please keep in mind that the goal of this chapter is to provide you with a quick introduction to reading annual reports. It is not feasible to read through every page of an AR, but I would like to provide some tips on how I would personally browse through one to determine what information is necessary and what information we can overlook.

I strongly advise you to read the Annual Report of ARBL while we are reading this chapter in order to better comprehend.

The annual report of ARBL is divided into the following 9 sections:

  • monetary highlights

  • The Management Declaration

  • Analysis and Discussion of Management

  • Highlights of the financial year 2010

  • Corporate Knowledge

  • Manager’s Report

  • Corporate governance report

  • Section Financial, and

  • Notice

Notably, no two annual reports are the same; each is tailored to the needs of the company while taking into account the sector in which it operates. Some of the sections of the annual report, though, are present in all annual reports.

The Financial Highlights portion of ARBL’s AR is the first section. The financials of the company for the previous year are summarised in Financial Highlights. This section’s content can be shown as a table or as data visualization. The operations and business results from various years are typically compared in this portion of the annual report.

The financial Highlights section information is essentially an excerpt from the company’s financial statement. The business may additionally include a few financial ratios it has calculated on its own in addition to the extracts. I don’t think I prefer to spend a lot of time on this area, but I glance through it quickly to gain an overview. I’m only going to skim this section because I’d already computed these and many other ratios on my own and would learn more about the business and its financials as a result. We will learn how to read and comprehend its financial statements over the course of the following chapters, as well as how to compute the financial ratios.

The “Management Statement” and “Management Discussion & Analysis” parts that follow are quite significant. I take my time reading these passages. You can get a sense from these sections of what the company’s management thinks about its operations and the market as a whole. Every word said in these parts matters whether you are an investor or a potential investor in the company. In reality, these two sections of the AR contain some of the information pertaining to the “Qualitative features” (covered in chapter 2).

I specifically recall one instance where I read the chairman’s message of a reputable tea manufacturing company. The chairman mentioned a revenue gain of around 10% in his message. The past revenue figures, however, indicated that the company’s revenue increased by 4-5 percent. It is obvious that in this situation, a growth rate of 10% felt like a celestial development. I made the decision not to invest in the company since this also suggested that the individual in charge might not be entirely in touch with reality. In hindsight, I realize that staying out of the market was probably the best course of action.

This is Amara Raja Batteries Limited, and I’ve highlighted a few sentences that I find particularly intriguing. I strongly advise you to read the Annual Report’s whole message.

The “Management Discussion & Analysis,” or “MD&A,” part comes next. One of the most significant passages in AR, in my opinion, is this one. The most common way for any corporation to begin this part is by discussing the broad economic trends. They talk about the nation’s overall economic activities as well as the mood in the corporate world regarding business. If the business is heavily dependent on exports, they may even discuss the state of the world economy and business climate.

Following this, the businesses often discuss market trends and their projections for the coming year. This is a crucial section since it explains how the company views the dangers and possibilities facing the sector. In order to determine whether the company has an advantage over its competitors, I read this and compared it to them.

For instance, if Exide Batteries Limited is a firm of interest, I would study their AR as well as this section if Amara Raja Batteries Limited is.

Keep in mind that up to this point, the Management Debate & Analysis’s discussion has been broad and general (global economy, domestic economy, and industry trends). The organisation would, nevertheless, talk about numerous business-related topics in the future. It discusses the performance of the company throughout its various divisions, how it compares to the prior year, etc. In fact, the business provides detailed figures in this section.

The annual report comprises a number of other reports, such as – the Human Resources report, R&D report, Technology report, etc., after reviewing these in “Management Discussion & Analysis.” In the context of the sector that the company operates in, each of these reports is significant. For instance, if I were reading an annual report for a manufacturing company, I would be very interested in the human resources report to determine whether the business had any labor issues. Serious labor problems could cause the factory to close, which would be bad for the company’s shareholders.

3.3 – The Financial Statements

The company’s financial statements are included in the last section of the AR. You would probably agree that the financial statements are among the most significant components of an annual report. The corporation will provide the following three financial statements:

  1. The Statement of Profit and Loss

  2. Financial Statements and

  3. Statement of cash flows

Over the course of the following chapters, we shall thoroughly comprehend each of these claims. It’s crucial to realize that the financial statements at this point arrive in two different formats.

  1. solo figures and a standalone financial statement

  2. Simply put, consolidated data or a consolidated financial statement.

We must comprehend the organisational structure of a corporation in order to distinguish between standalone and consolidated data.

A reputable business typically has numerous subsidiaries. These businesses also serve as holding corporations for a number of other well-known businesses. I’ve used the shareholding structure of CRISIL Limited as an example to assist you better comprehend this. The yearly report of CRISIL has the same information. As you may already be aware, CRISIL is an Indian business that specialises in providing corporate credit rating services.

As shown in the shareholding arrangement above:

  1. A 51 percent share in CRISIL is owned by the US-based rating firm Standard & Poor’s (S&P). S&P is therefore the “Holding firm” or “Promoter” of CRISIL.

  2. The remaining 49% of CRISIL shares are held by public and other financial organisations.

  3. S&P, however, is a wholly owned subsidiary of The McGraw-Hill Companies, a different business.

1. This indicates that S&P is wholly owned by McGraw Hill, and S&P controls 51% of CRISIL.

4. Additionally, another firm called “Irevna” is entirely owned (100 percent shareholding) by CRISIL.

Consider this fictitious circumstance while keeping the aforementioned in mind.
Let’s say that during the 2014 fiscal year, CRISIL experiences a loss of Rs. 1000 crore and Irevna, its sole subsidiary, experiences a profit of Rs. 700 crore. What do you think the general profitability of CRISIL?

Irevna, a subsidiary of CRISIL, had a profit of Rs. 700 Crs., hence the company’s entire P&L is (Rs. 1000 Crs.) + Rs. 700 Crs., which is pretty straightforward (Rs.300 Crs).

Because of its subsidiary, CRISIL’s loss is down from a staggering loss of Rs. 1000 Crs. to Rs. 300 Crs. Another way to look at it is to say that while CRISIL lost Rs. 1000 crore on a standalone basis, it lost Rs. 300 crore on a consolidated basis.

As a result, standalone financial statements only include the company’s financials as a whole, excluding those of its subsidiaries. The company’s (i.e., standalone financials) financial statements as well as those of its subsidiaries are included in the consolidated numbers.

To better understand the financial status of the company, I personally like to review the consolidated financial accounts.

3.4 – Schedules of Financial Statements

When the corporation releases its financial accounts, it often does so in its entirety and is followed by a thorough explanation.


Line items are the names given to each detail in the financial statement. For instance, the share capital is the first line item under Equity and Liability on the balance sheet (as pointed out by the green arrow). If you look closely, the share capital is accompanied by a note number. These are referred to as the financial statement’s “Schedules.” Based on the aforementioned assertion, ARBL reports that the share capital is Rs. 17.081 billion (or Rs.170.81 Million). Naturally, as an investor, I’m curious about how ARBL arrived at its share capital of Rs. 17.081 Cr. To determine this, one must examine the related timetable.


Of course, lingo like “share capital” makes sense given that you might be unfamiliar with financial reporting. The financial statements are simple to understand, though, and throughout the course of the following chapters, you will learn how to read them and understand what they mean. But for the time being, keep in mind that the main financial statement just provides a summary, while the related schedules provide more specific information on each line item.


  1. A firm’s annual report, or AR, is an official message from the company to its shareholders and other interested parties.
  2. Since AR is the best resource for company-related information, investors should always turn to it first when looking for that information.
  3. The AR is divided into numerous sections, each of which emphasizes a different facet of the company.
  4. The AR is also the ideal resource for learning about the company’s qualitative elements.
  5. One of the most crucial elements of AR is management discussion and analysis. It includes the management’s viewpoint on the economy as a whole, their assessment of the sector they work in for the previous year (what worked and what didn’t), and their predictions for the upcoming year.

  6. Three financial statements are included in the AR: a profit and loss statement, a balance sheet, and a cash flow statement.

  7. The financial data for just the company under examination is included in the solo statement. The financial data for the company and its subsidiaries is included in the consolidated numbers.

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