Annual reports should present investors with the most essential information and effectively convey the company’s core message. For investors, the annual report should be their default source for obtaining information about a company as it is more reliable than any other third-party sources. The annual report is usually available on the company website.
The objective of this section is to provide a summary of an annual report as going through every page of an annual report is not viable.
Financial Highlights: It provides a summary overview of the company’s financial performance for the past few years. It provides a multi-year comparison of business and operating metrics in a tabular or graphical form.
Management Discussion & Analysis/About the Company: These sections provide insights into the viewpoints of the company’s management regarding their business and the industry as a whole. It helps the investor to understand the business (Qualitative Analysis) as it contains different information about the company’s vision, objectives, organizational structure, etc.
Financial Statements: Every company provides three financial statements:
- Profit & Loss Statement: It contains information on the company's revenue, expenses incurred to generate the revenue, tax, and depreciation. It shows how the company performed in a particular financial year.
- Balance Sheet: It contains information on the assets, liabilities, and the shareholders' equity of the company. It shows how the company has evolved financially over the years.
- Cash Flow Statement: It shows how much cash the company is actually generating. It is an integral part of an entity’s financial statement as it reveals the true cash position of the company.
Note that this is just a brief description of the different financial statements just to know what each statement represents.
Financial Ratios
Financial ratios help to analyze the numbers presented on the financial statements. It helps to interpret the results and allows comparison with the past years along with other companies in the same industry. Remember, while comparing the financial ratios between companies be sure to compare among the companies which are in the same industry.
Financial ratios can be classified into different categories:
- Profitability Ratios: Profitability ratios help analysts in evaluating a company’s profit-making ability, indicating its performance in generating profits.
- Leverage Ratios: Leverage ratios assess a company’s capacity to sustain its day-to-day operations over the long term and measure how much debt the company relies on to support its growth.
- Valuation Ratios: Valuation ratios analyze the company’s stock price in relation to either its profitability or overall value, providing insight into whether the stock is trading at an affordable or expensive price.
- Operating Ratios: Operating ratios assess how effectively a business can turn its assets into revenue, offering insights into the company’s management efficiency.
We will dive deeper into these financial ratios in the next chapter.
Next Chapter: Profitability Ratios & Leverage Ratios
