What are Annual Reports?
An annual report is basically a comprehensive report on a company’s activities throughout the preceding year. It is a publication that public corporations must provide annually to shareholders to It was not until legislation was enacted after the stock market crash of 1929 that the annual report became a regular component of corporate financial reporting. The intent of the required annual report is to provide public disclosure of a company’s corporate activities over the past year. The report is typically issued to shareholders and other stakeholders who use it to evaluate the firm’s financial performance. Annual reports have been a Securities and Exchange Commission (SEC) requirement for businesses owned by the public since 1934. Companies meet this requirement in many ways. At its most basic, an annual report includes:
- General description of the industry or industries in which the company is involved
- Audited statements of income, financial position, cash flow, and notes to the statements providing details for various line items.
- A management’s discussion and analysis (MD&A) of the business’s financial condition and the results that the company has posted over the previous two years.
- A brief description of the company’s business in the most recent year.
- Information related to the company’s various business segments.
- Listing of the company’s directors and executive officers, as well as their principal occupations, and, if a director, the principal business of the company that employs him or her.
- Market price of the company’s stock and dividends paid.
The annual report contains information on a company’s financial position that can be used to measure:
- A company’s ability to pay its debts as they come due
- Whether a company made a profit or loss in its previous fiscal year
- A company’s growth over a number of years
- How much earnings is retained by a company to grow its operations
- The proportion of operational expenses to revenue generated
Many companies even view their annual report as a potentially effective marketing tool to disseminate their perspective on company fortunes. With this in mind, many medium-sized and large companies devote large sums of money to making their annual reports as attractive and informative as possible. In such instances the annual report becomes a forum through which a company can relate, influence, preach, opine, and discuss any number of issues and topics.
Understanding Annual Reports
The annual report (AR) is a yearly publication by the company and is sent to the shareholders and other interested parties. The annual report is published by the end of the Financial Year. It was not until legislation was enacted after the stock market crash of 1929 that the annual report became a regular component of corporate financial reporting. The intent of the required annual report is to provide public disclosure of a company’s corporate activities over the past year. The report is typically issued to shareholders and other stakeholders who use it to evaluate the firm’s financial performance.
Following are the main sections an annual report has that needs to be dwelled on:
- Director’s Report: This section provides brief summary on financials, explanation of the financial results, key developments in the company. Things to look in here are operational parameters of the company such as capacity additions, capex plan / executed during the year, order book as on financial year end, average revenue per user, etc.
- Management discussion and analysis (MDA): This section provides information on trends in the industry, SWOT analysis of the company, insights on key line items of financial statements and risk factors/concerns affecting the company performance.
- Financial Highlights: This section contains the financial statements of the company including-
- The Profit and Loss statement
- The Balance Sheet and
- The Cash flow statement
- Vision and mission statements of the company: In this section, you will get to read vision and mission statement, values and goals of the company. These statements are general in nature.
- Report on Corporate governance: This section gives insight on corporate governance followed by a company, composition of board of directors, brief background information on directors and independent directors of the company, remuneration of directors etc.
- Information on shares of the company: This section provides information on historical performance of share price, share holding pattern of the company, pledging of shares by promoters during the year, split of shares, bonus shares distributed, etc.
- Products overview and financial highlights in last 5 to 10 years– This section gives details of products being manufactured by a company, segment wise performance in last two years, key raw materials consumed, etc. Some companies publish financial highlights of 5 to 10 years in annual reports.