As an investor, your number one priority is to find a good business to invest in. in order to find the good business you have to first understand the business and the company.
How will you know which company is best to invest?
A. By understanding the financial position of the business. How good the finances of the company is?
Where you will Get the financials of any Company?
A. In their Annual Report
What is Annual Report?
Annual report is a document every public- traded-company has to produce every quarterly and annually. It is compalsary for every public companies to submit their annual report to the Stock exchange.
The annual report maninly provide the financial health of the company as well as other relevant information about the company.
The most important section of any annual Report is their Financial Satements.
As an investor, you can use the annual report to make a decisicive decision for your investing.
In short, Annual report to you as an investor is a report card of that company.
Where do you Get an Annual Report?
Annual report of any company are available in the public domain. You can download it from company website, NSE , BSE websites. Or from any financial sites.
An easy way to find this is by searching “[Company name] + “Annual report” in Google.
What’s Included in the Annual Report?
For understanding, I take the Annual report of TCS(Tata Consaltancy Company).
You can down the annual report form Here.
Annual report of any company is very lengthy. Avarage nunver of pages in annual report is 200-300. And it is filled for data and information. It becomes very difficult to read every details.
So, what exactly in the annual report that makes it so valuable?
The most important information in the annual report is Financial statement.
There are other information also like their shareholdings patterns, CSR reort, Management information.
You can get he idea by the content of the Annual report.
1 Financial Statement
2.Management discussion and analysis
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (usually referred to as just MD&A) is a section that allows the company’s management to discuss the company’s performance overall.
3. Shareholdings pattern
4. Management Information
5. Information About Next AGM
There is information about the next Annual General Meetings. Its venue and other pieces of information about meetings.
6. Corporate Social Responsibility
There is also information about Corporate Social Responsibility. Nowadays it is important to show the CSR report in the Annual Report.
How do you best read the Financial Statement of the company?
Financila statement is like a butter of Annual Report. This will show you how company has performed last year. How its revenue has grown for the last year. What are the assets and the liabilities of the company? How the company has manages debt?
Financial statement has the three Component
- Profit and loss Statement
- Balance sheet
- Cashflow statements
Profit and loss statements are also called income statements.
Now, Lets discuss one by one…
1. Income statement
Income statements tell how much profit the company has made in one year. It summarizes how much money the company has made during the year and how much it has spent
The major components of the income statements are
- Revenue (Sales)
- Cost of Revenue (Expanses)
- Net Profit
The net profit is the basically is the difference between the sales and the total expanses.
Lets understand income statement with simple example
|Other expanses||₹ 5000|
|Your profit||₹ 27,000|
Now lets look at the income statement of TCS
2. Balance Sheet
“How much am I really worth”? That’s an interesting question, isn’t it? The
main purpose of the balance sheet is to answer that question.
Balance sheet of any Company show the financial position of that Company at certain point of time.
Balance Sheet has there part:
- Shareholders Equity
Both side of the Balance is always Balanced.
Asset= Liabilities + Shareholders’ Equity
Here the Balance sheet of TCS.
3. Cashflow Statements
The cashflows shows how the cash is flowing in the business. They measure how cashb is moving in and out of the company.
The cash flow has three components:
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from Financing activities
Cash flow from operating income
Cash generated from operations reflects the ability of the organization to
generate cash from its core business operations. As such, we want the cash flow from operations to be as high as possible.
Cash flow from investing activities
Cash flow from investing activities is a section of the cash flow statement that shows the cash generated or spent relating to investment activities.
Cash flow from financing activities
This cash flow statement, which shows the net flows of cash that are used to fund the company.
Here is the cash flow statement of TCS
Caution: The Annual Report of any company is Created by that company itself. So Never trust the Financial statement blindly.
Reading financial statement of any company is the stating point of you investing journey.
To understand the Financial statement you should have some basics of Accounting. Learn accounting, it is not that hard.
Warren Buffet Said that Accounting is a language of the business.