Beyond numbers: decoding annual reports

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The previous lesson gave you a preview of the financial statements of a company. Now, it’s time to look beyond the numbers and get a better idea of the qualitative aspects that determine a company’s future outlook. Here’s where the annual report of a company proves to be invaluable. 

Prepared by the company itself, an annual report contains a variety of sections that deal with multiple aspects of the company, its internal state of affairs, the micro and macro economic conditions in which it operates and of course, its financials. 

What is an annual report?

As the name itself implies, an annual report is essentially a report of the financial, non-financial and other activities of a company. The data in the annual report of a company contains only the information that’s relevant for the investors. It is published on a yearly basis, after the end of each financial year and it’s sent to all interested parties including the shareholders of the company. 

Once the report is published, investors, potential investors and the general public can access it by simply visiting the ‘Investors’ section of a company’s website. Since all of the data contained in the annual report is official and comes straight from the company itself, it is a great way to obtain reliable information. 

That explains the answer to ‘What is an annual report?’ Let’s now see what information you can gather from this document.

Looking beyond the numbers in an annual report 

Generally, the annual report is divided into multiple sections. While a major part of the report deals with the financials and accounting data, it also consists of other qualitative aspects of the company. Let’s take a brief look at some of the important sections of a company’s annual report, beyond its numbers.

An overview about the company

You can typically find this section right at the start of the annual report itself. It gives you a brief introduction about the company and its history. In addition to that, the section may also contain information and statistics about the various divisions, sub-brands and portfolio of products and services offered by the company. 

As you make your way through this section, you may also find it focusing increasingly on significant changes that happened in the past year, such as mergers and acquisitions, demergers and business expansions, if any. 

The business strategy of the company 

As a prospective investor, you’ll find that this is one of the most important sections of a company annual report. It allows you to gauge the company’s ideals and the way it carries out its business. Here, you will find the vision and mission statements, which are great indicators of the company’s purposes, goals and values.  

This section elaborates more on the company’s objectives for its business and on where it ultimately desires to be in the future. You can also find the various strategies and approaches that the company employs to satisfy its business objectives. 

Corporate Social Responsibility: A subsection in the directors’ report

The directors’ report is another major section of the annual report of a company. It contains different  subsections that deal with the financial highlights, the state of affairs, the results of their operations, business description, human resources management and policies, corporate governance policies and information on auditors and audit reports. 

While these sections deal with the financials and regulatory aspects, there’s another qualitative area that you need to look into - corporate social responsibility (CSR). The term ‘corporate social responsibility’ denotes the initiatives and efforts taken by a company to improve communities and the society at large. It includes measures like implementing eco-friendly policies, donating money and supplies to non-profit organisations and other philanthropic activities. 

As an investor, it is important for you to look into the CSR activities of a company, since it speaks volumes about the way a company conducts its business and gives back to the society. A company that invests a significant portion of its money into CSR enjoys greater goodwill amongst the general public. This may indirectly have the effect of boosting the company’s revenue through increased sales. A business that gives back to the community also enjoys a positive social impact  and is valued higher by investors.  

Management discussion and analysis 

This section of a company’s annual report talks about the company’s quantitative and qualitative performance in the past year. It serves to help you understand the point of view of the management and its thought process. This area covers a wide range of topics such as the macroeconomic situations, the management’s comments on industry structure and developments, the opportunities and threats faced by the company and the presence of internal control systems and their adequacy.

As a prospective investor, this section can provide you with some insightful information about how the company’s key members think and operate. The information provided by the management discussion section of a company’s annual report can even help you take informed decisions about investing in that company. 

Wrapping up

The annual report of a company, as you’ve seen, is prepared by the company itself. To adequately back your research with all available information, you also need to look into the reports prepared by third-party experts. Analyst reports, for instance, contain a wealth of information about a business or an industry. That’s what we’ll be learning in the next chapter of this module.

A quick recap

  • An annual report contains a variety of sections that deal with multiple aspects of the company, its internal state of affairs, the micro and macro economic conditions in which it operates and of course, its financials. 
  • It is published by the company itself, on a yearly basis, after the end of each financial year.
  • While a major part of the report deals with the financials and accounting data, it also consists of other qualitative aspects of the company.
  • The report gives you an overview about the company and it contains information and statistics about the various divisions, sub-brands and portfolio of products and services offered by the company. 
  • The section on the business strategy of the company gives you its vision and mission statements, which are great indicators of the company’s purposes, goals and values.  
  • The directors’ report is another major section of the annual report. It contains different  subsections that deal with the financial highlights, the state of affairs, the results of their operations, business description, human resources management and policies, corporate governance policies and information on auditors and audit reports. 
  • The directors’ report also has another qualitative area that you need to look into - corporate social responsibility (CSR). 
  • The term ‘corporate social responsibility’ denotes the initiatives and efforts taken by a company to improve communities and the society at large.
  • This section on management discussion and analysis talks about the company’s quantitative and qualitative performance in the past year. It helps you understand the point of view of the management and its thought process.
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