How to read a company’s annual report?

By Guest Blogger at 26 April, 2009, 10:48 am

The annual report is the most under utilized document by the investor even though it is the most crucial document of the company. Sure, a financial analyst reads the report thoroughly but it is rather unusual to hear an individual investor going through an annual report of the company. First of all, what is an Annual Report? An annual report is a document to be prepared by all public limited companies. It gives an overall picture of a company’s financial well being as well as its growth strategy. It supposedly contains the most authentic information pertaining to the company barring any Satyam’s Raju-like activities.
One of the reasons that individual investors don’t bother to look into this document might be due to the voluminous nature of this document and the sheer amount of data that it contains can easily scare a novice investor like me. Moreover it contains a lot of jargon like EPS, CAGR etc that glorify a financial analyst’s job. In this post, I am going to talk about the 3 most important factors to look for prior to investing in a company.

Debt/Equity Ratio: Debt equity ratio offers one of the best pictures of a company’s leverage (debt) as it indicates a company’s financial risk. A high debt equity ratio (i.e. more than 1) signifies heavy borrowings by a company which would be harmful as most part of the revenue would be spent in paying the interest thus a lower debt equity ratio would be more beneficial for a company as it would mean long term stability and scope for future expansion hence increasing a shareholder’s returns.
Book Value of Shares: Book value of shares refers to the value of one share as per total investment of shareholders in accordance to the books of accounts. Book Value per share is the ratio of equity shareholders fund to no. of equity shares. If the market value of the shares is less than the book value it signifies that the share is under priced and on the reverse side if the market price is more then it is over priced.
Asset Backing: Analyzing a company’s assets is crucial. The more the assets of the company safer is the investment. Thus look for a company with a good asset backing in terms of tangible and intangible assets such as freehold properties, investments and its cash flows and last but not the least its brand name and goodwill. Thus there are lesser known chances of the company to go bankrupt.

The above factors are basic guidelines and vary from industry to industry and from company to company hence it should be carefully analysed.
Thus before investing in a company one must take into account the above credentials so as to get higher returns in the near future.

Author Details: The post was written by Jui Vaze who recently started investing in the Indian stock market and is giving insights using her personal experiences. Jui is currently studying to be a Chartered Accountant.

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