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Chapter 3
Since the annual report is published by the company, whatever is mentioned in the AR is assumed
to be official. Hence, any misrepresentation of facts in the annual report can be held against the
company. To give you a perspective, AR contains the auditors certificates (signed, dated, and
sealed) certifying the sanctity of the financial data included in the annual report.
Potential investors and the present shareholders are the primary audience for the annual report.
Annual reports should provide the most pertinent information to an investor and should also
communicate the companys primary message. For an investor, the annual report must be the
default option to seek information about a company. Of course there are many media websites
claiming to give the financial information about the company; however the investors should avoid
seeking information from such sources. Remember the information is more reliable if we get it get
it directly from the annual report.
Why would the media website misrepresent the company information you may ask? Well, they may
not do it deliberately but they may be forced to do it due to other factors. For example the company
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may like to include depreciation in the expense side of P&L, but the media website may like to
include it under a separate header. While this would not impact the overall numbers, it does
interrupt the overall sequencing of data.
Let us briefly go through the various sections of an annual report and understand what the
company is trying to communicate in the AR. For the sake of illustration, I have taken the Annual
Report of Amara Raja Batteries Limited, belonging to Financial Year 2013-2014. As you may know
Amara Raja Batteries Limited manufactures automobile and industrial batteries. You can
download ARBLs FY2014 AR from here (http://www.amararaja.co.in/annual_reports.asp)
Please remember, the objective of this chapter is to give you a brief orientation on how to read an
annual report. Running through each and every page of an AR is not practical; however, I would
like to share some insights into how I would personally read through an AR, and also help you
understand what kind of information is required and what information we can ignore.
For a better understanding, I would urge you to download the Annual Report of ARBL and go
through it simultaneously as we progress through this chapter.
Financial Highlights
The Management Statement
Management Discussion & Analysis
10 year Financial highlights
Corporate Information
Directors Report
Report on Corporate governance
Financial Section, and
Notice
Note, no two annual reports are the same; they are all made to suite the companys requirement
keeping in perspective the industry they operate in. However, some of the sections in the annual
report are common across annual reports.
The first section in ARBLs AR is the Financial Highlights. Financial Highlights contains the
birds eye view on how the financials of the company looks for the year gone by. . The information
in this section can be in the form of a table or a graphical display of data. This section of the annual
report generally does a multi-year comparison of the operating and business metrics.
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The details that you see in the Financial Highlights section are basically an extract from the
companys financial statement. Along with the extracts, the company can also include a few
financial ratios, which are calculated by the company itself. I briefly look through this section to get
an overall idea, but I do not like to spend too much time on it. The reason for looking at this section
briefly is that, I would anyway calculate these and many other ratios myself and while I do so, I
would gain greater clarity on the company and its numbers. Needless to say, over the next few
chapters we will understand how to read and understand the financial statements of the company
and also how to calculate the financial ratios.
The next two sections i.e the Management Statement and Management Discussion &
Analysis are quite important. I spend time going through these sections. Both these sections gives
you a sense on what the management of the company has to say about their business and the
industry in general. As an investor or as a potential investor in the company, every word mentioned
in these sections is important. In fact some of the details related to the Qualitative aspects (as
discussed in chapter 2), can be found in these two sections of the AR.
In the Management Statement (sometimes called the Chairmans Message), the investor gets a
perspective of how the man sitting right on top is thinking about his business. The content here is
usually broad based and gives a sense on how the business is positioned. When I read through this
section, I look at how realistic the management is. I am very keen to see if the companys
management has its feet on the ground. I also observe if they are transparent on discussing details
on what went right and what went wrong for the business.
One example that I explicitly remember was reading through the chairmans message of a well
established tea manufacturing company. In his message, the chairman was talking about a revenue
growth of nearly 10%, however the historical revenue numbers suggested that the companys
revenue was growing at a rate of 4-5%. Clearly in this context, the growth rate of 10% seemed like a
celestial move. This also indicated to me that the man on top may not really be in sync with ground
reality and hence I decided not to invest in the company. Retrospectively when I look back at my
decision not to invest, it was probably the right decision.
Here is the snapshot of Amara Raja Batteries Limited; I have highlighted a small part that I think is
interesting. I would encourage you to read through the entire message in the Annual Report.
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Moving ahead, the next section is the Management Discussion & Analysis or MD&A. This
according to me is perhaps one of the most important sections in the whole of AR. The most
standard way for any company to start this section is by talking about the macro trends in the
economy. They discuss the overall economic activity of the country and the business sentiment
across the corporate world. If the company has high exposure to exports, they even talk about
global economic and business sentiment.
ARBL has both exports and domestic business interest; hence they discuss both these angles in
their AR. See the snapshot below:
Following this the companies usually talk about the trends in the industry and what they expect for
the year ahead. This is an important section as we can understand what the company perceives as
threats and opportunities in the industry. Most importantly I read through this, and also compare
it with its peers to understand if the company has any advantage over its peers.
For example, if Amara Raja Batteries limited is a company of interest to me, I would read through
this part of the AR and also would read through what Exide Batteries Limited has to say in their
AR.
Remember until this point the discussion in the Management Discussion & Analysis is broad based
and generic (global economy, domestic economy, and industry trends). However going forward, the
company would discuss various aspects related to its business. It talks about how the business had
performed across various divisions, how did it fare in comparison to the previous year etc. The
company in fact gives out specific numbers in this section.
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Some companies even discuss their guidelines and strategies for the year ahead across the various
verticals they operate in. Do have a look at the snapshot below:
After discussing these in Management Discussion & Analysis the annual report includes a series of
other reports such as Human Resources report, R&D report, Technology report etc. Each of these
reports are important in the context of the industry the company operates in. For example, if I am
reading through a manufacturing company annual report, I would be particularly interested in the
human resources report to understand if the company has any labor issues. If there are serious
signs of labor issues then it could potentially lead to the factory being shut down, which is not good
for the companys shareholders.
Finally, the last section of the AR contains the financial statements of the company. As you would
agree, the financial statements are perhaps one of the most important aspects of an Annual Report.
There are three financial statements that the company will present namely:
We will understand each of these statements in detail over the next few chapters. However at this
stage it is important to understand that the financial statements come in two forms.
Typically, a well established company has many subsidiaries. These companies also act as a holding
company for several other well established companies. To help you understand this better, I have
taken the example of CRISIL Limiteds shareholding structure. You can find the same in CRISILs
annual report. As you may know, CRISIL is an Indian company with a major focus on corporate
credit rating services.
a. Standard & Poors (S&P), a US based rating agency holds a 51% stake in CRISIL. Hence S&P
is the Holding company or the Promoter of CRISIL
b. The balance 49% of shares of CRISIL is held by Public and other Financial institutions
c. However, S&P itself is 100% subsidiary of another company called The McGraw-Hill
Companies
i. This means McGraw Hill fully owns S&P, and S&P owns 51% of CRISIL
d. Further, CRISIL itself fully owns (100% shareholding) another company called Irevna.
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Keeping the above in perspective, think about this hypothetical situation. Assume, for the financial
year 2014, CRISIL makes a loss of Rs.1000 Crs and Irevna, its 100% subsidiary makes a profit of
Rs.700 Crs. What do you would be the overall profitability of CRISIL?
Well, this is quite simple CRISIL on its own made a loss of Rs.1000 Crs, but its subsidiary Irevna
made a profit of Rs.700 Crs, hence the overall P&L of CRISIL is (Rs.1000 Crs) + Rs.700 Crs =
(Rs.300 Crs).
Thanks to its subsidiary, CRISILs loss is reduced to Rs.300 Crs as opposed to a massive loss of
Rs.1000 Crs. Another way to look at it is, CRISIL on a standalone basis made a loss of Rs.1000
Crs, but on a consolidated basis made a loss of Rs.300 Crs.
Hence, Standalone Financial statements represent the standalone numbers/ financials of the
company itself and do not include the financials of its subsidiaries. However the consolidated
numbers includes the companies (i.e.standalone financials) and its subsidiaries financial
statements.
I personally prefer to look through the consolidated financial statements as it gives a better
representation of the companys financial position.
Have a look at the snapshot of one of ARBLs financial statement (balance sheet):
Each particular in the financial statement is referred to as the line item. For example the first line
item in the Balance Sheet (under Equity and Liability) is the share capital (as pointed out by the
green arrow). If you notice, there is a note number associated with share capital. These are called
the Schedules related to the financial statement. Looking into the above statement, ARBL states
that the share capital stands at Rs.17.081 Crs (or Rs.170.81 Million). As an investor I obviously
would be interested to know how ARBL arrived at Rs.17.081 Crs as their share capital. To figure
this out, one needs to look into the associated schedule (note number 2). Please look at the
snapshot below:
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Of course, considering you may be new to financial statements, jargons like share capital make not
make much sense. However the financial statements are extremely simple to understand, and over
the next few chapters you will understand how to read the financial statements and make sense of
it. But for now do remember that the main financial statement gives you the summary and the
associated schedules give the details pertaining to each line item.
Module 3
Chapters
91 comments
1. devasia pm says:
November 27, 2014 at 1:10 am
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Thank you
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2. J V Indudhar says:
December 20, 2014 at 2:57 pm
This modules are very helpful and hats-off to the simple explanation thanks a lot
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4. srihari says:
April 10, 2015 at 3:11 pm
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Well, this is quite simple CRISIL on its own made a loss of Rs.1000 Crs, but its subsidiary
Irevna made a profit of Rs.700 Crs, hence the overall P&L of CRISIL is (Rs.1000 Crs) +
Rs.700 Crs = (Rs.300 Crs).
Waiting for the options module. Thankyou very much for whole material. It is excellent
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NoCRISIL made a loss of Rs.1000 Crs, hence this should be deducted from the profit
of Rs.700 Crs. Net loss is therefore Rs.300Crs. By the options module has started, we
are 4 chapters through with itcheck this
http://zerodha.com/varsity/module/option-theory/
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Indranil says:
August 10, 2015 at 10:56 am
the bracketed (Rs.1000 Crs) actually means -Rs.1000 Crs i think ..thats why the
confusion.
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I suppose you can click on the images to enlarge it. Also, we are working on an e-book
format, the images will be much clearer in that.
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thank u very much..its very simple and lucid explation..i read ur technical analysis also
completly..its extra ordinary.. hatsoff to u
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If we go through every company AR, They all talk about their future in a positive way about
their expansions and investments. How can we segregate companies?
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Thanks for reply. I agreed for your answer. Apart from this how can we choose a sector which
will do better in this year or a particular period of time like IT did in early 2000s ? What are
the aspects should be considered while doing this ?
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To figure out which sector is likely to well in the coming years requires a detailed
understanding on
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These aspects clearly help in figuring out which sectors are likely to do well in the
future.
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Your Modules are very helpful for a new investor in the market like me .I have a small
query,where can a retail investor get a companys 10 years of financial statements or annual
Reports
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You can find the information on the companys website. For example check this
http://www.tataglobalbeverages.com/our-investors/annual-reports
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Very good content posted for us. Undoubtedly a very good learning for new comers(me).
Have one question.
I am assuming all the companies release their Annual Reports on or before March 31st xxxx.
Is my assumption correct?
If yes, will all the long term investors invest from April xxxx?
If yes, will there be huge volume investing in April?
Do we see subdued activity in the remaining months from the long term investors?
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AR comes out by around April. However long term investors dont really wait for the AR
to be released. They prefer to study and understand how the business has evolved over
years, which is available in previous years AR.
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Sanjeev says:
September 30, 2015 at 6:12 am
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While explaining consolidated financial statement by focusing on the impact a subsidiary has
on its holding company.
I wanted to know, what would be the consolidated financial statement for the subsidiary
company (Irevna, for instance).
Will it have a profit or loss ? (keeping Crisil has a loss of 1000cr and Irevna has a profit of
300 crores).
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Usually the company gives out the financials of subsidiary at least the basic info like
revenue, EBITDA, EBIT, PAT.
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Thankyou.
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Welcome!
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The best platform to get the details knowledge of finance without paying a penny!Hats off to
you guys for this social service.Thanks a lot.
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Well explained, just the practical useful part, I found the whole chapter 3 very informative
from a new entrant point of view. Thanks.
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Like Annual report from company website where do we get Quarterly reports of a company ?
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God bless you all for taking this initiative. I have a lot of interest in markets and finance, but
also the mental block that these were never my subjects. Have tried to attain clarity from
various sources, left almost no stone unturned to seek help in learning all this, but never
came across anything so clear and simple. Thanks a lot for reviving my hopes.
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Glad to hear that Deepshikha! I hope the contents here helps you not in understanding
the subject but also identify profitable opportunities.
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Why has amara raja batteries not published its annual report for FY16 till now. It is 9th of july
2016 and the year ended on 31st March 2016.
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The contents are really helpful. Are there any other organised resources that one refer to??
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If I want to have Annual report of any company in physical form directly from the company,
how can I get it?
Also, Is it mandatory for me to be a shareholder in that company at the time of requesting for
annual report?
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You can contact the company to get the copy of the AR, and no you need not be a
shareholder of the company to get one.
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Hi Karthik,
First off all thanks for your effort to make us educate about the stock market. This chapter
talks all about how to analyse and do valuation a company. But my problem is that how can I
choose a company among thousands several companies. What was your approach when you
chose Amaraja?
Thanks,
Deepak
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Reply
A simple screening technique will help you shortlist companies. You can use sites like
screener.in for this!
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Himanshu says:
October 24, 2017 at 11:07 pm
Interesting that you mentioned screener for initial shortlisting, what criteria/filter
you put ?
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Well, the same that Ive mentioned towards the end of this module
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Very soft and simple language used to explain. Much easy to understand, thanks zerodha
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Thanks Rahul!
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However I find it hard to believe that any chairman for any publicly traded company will lie
so outrightly about his company. In other words , dont the companies take adequate
measures to ensure that the various facts mentioned in AR are in sync ?
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He certainly was not lying. In fact, when management makes a forward looking
statement, it is a reflection of what they expect out of the coming year(s). In this
particular case, the expectations were way too much. By the way, this is not too
uncommon look back at management statements from Suzlon, IVRCL etc.
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Oh that was a forward looking statement ? I thought that was the assessment of
year gone by
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Thank you
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What will be some good reading material to follow to study and know about companies for
Fundamental Analysis ?
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You are at the right place to learn about FA. Start here and follow up with companies
Annual Report.
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Ok. Thanks Karthik. Will the companys annual report be enough to learn about
the company..?
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Cheers!
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Hi Karthik Sir,
Awesome articles. I have never found any article about Fundamental Analysis of such
simplicity. Thank you very much for your effort.
I have one question. How can I make sure whether the management of a company of my
interest is good enough to sustain the growth of that company?
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Estimating the management is the most difficult thing to do, no straight solution for
this
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Hi Karthik
Is there a place where we can find the exact time of the result release. Every website only
publishes the date but not the time of release.
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So, we keep looking at the stock price for break-out, confirming the results ?
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Hi there ,
What is Indian equivalent of SEC filings in the US. I ask because in US , AR are jazzed up
compared to SEC filings. Please advise.
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Articles are good. I am going through it one by one. Are you having downloadable ebook. As I
am new to market I have started to read this articles as per index. But I feel it is better to
learn first fundamental then technical. You should have given fundamental topics first and
technical articles afterwards. What you think, I am correct or I should understand first
technical analysis first.
Once again thanks for providing this easy to understand and assisting to gain the knowledge
of market.
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Its all online Sunil, you can choose to read FA first and then TA. It does not make any
difference in my opinion
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Happy learning.
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In the last snapshot, how is the subscribed capital more than the issued capital?
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Where does the money raised from series-A and series-B funding add up? Does it add up in
the issued share capital or paid-up capital or neither?
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Issued.
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Where does the money raised from series-A and series-B funding add up? Does it add up in
the issued share capital or paid-up capital or neither??
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Sid says:
September 12, 2017 at 5:13 pm
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Most likely.
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Cheers!
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Ah, note 2 is talking about the share capital, which is basically core to the share holders
equity. Gives you information on authorized capital, issued, subscribed capital etc.
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Dear Karthik. Hats off to your efforts in bringing an article so easy to understand on how to
read an AR.
I am deciding to invest my money in equity but I see so many companies with good financials
that I couldnt finalize where to invest in.
I am 23 years, working in a PSU and very much interested in personal finance. It was Zerodha
only from where I took entry in share market, a place where money can me made at the
highest rate possible in current scenario with heavy risk. I lost some money during initial
days in day trading and then I realized it is very important to gain substantial knowledge in
this field to save the capital. Then I saw VARSITY!! I fell in love with it when I read it just for
the first time. I have committed to myself without adequate learning, I wont swim down.
Thanks for helping me in my process of being a good swimmer!!
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Like they say, the only edge in the stock market is you Knowledge. So stay committed,
work heard, and learn! Im sure markets will reward you for it
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Modules
1. Introduction to Stock Markets
14 chapters
2. Technical Analysis
20 chapters
3. Fundamental Analysis
16 chapters
4. Futures Trading
12 chapters
23 chapters
6. Option Strategies
13 chapters
7 chapters
17 chapters
16 chapters
3 chapters
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