The first and foremost thing about an Annual Report study, is to get the feel of the management. Its my request, that before one gets into the financials,its better to understand the management quality and management intent. Its easier said than done but a genuine attempt must be made. In order to discover it, look at the following aspects:

 

1.Simplicity of presentation. I beleive its the most critical aspect of Annual report presenation. An analyst/investor has to go through so many companies' report that at times, time's the really scarcest commodity on earth. After May end, everyday they have to go through 5-10 Annual reports besides analysing quarterlies. So,in case a company tries to add a lot of jazzy stuff, it actually is doing a big dis-service to the investor community. A good company, tries to send strong message through the Annual report itself. In this context, I will like to talk about Cipla, whose last year's Annual report was extremely simple. I was quite amazed so I asked my dad whats the cause of this simplicity. Then I found it written somewhere that the company has tried to make saving on that count and made a donation to its Cancer Foundation with that money. I know such things dont matter in this material world but someway down the line I will always like to have a company which maintains high degrees of Social Responsibility.

 

2.Auditors report: Extremely important to read the Annual report. Infact, the first assignment which my dad gave me when I was in class XI, was to write on top of the Annual report, whether the company is regular/generally regular/irregular in making payments towards statutory liabilities like PF, ESI, Tax authorities etc.A company which is not regular is to be avoided at all cost. Genrally regular Companies are also to be deeply studied before committing money.Look at possible qualifications.

 

3.Look at whether the 10-year/5-year Financial Highlights have been provided or not. A performer will always show that. Its not a boast,but its a matter of integrity to enable investors to take a call. Financial performance follows a trend, and good companies will never try to hide a bad year.

 

4. In case you are looking to invest into a company in which you are not invested in, them try to make a correspondance with that company and you will understand a lot of things. In this context, I must mention about three companies: Infosys, Foseco india and Abbott India. I will always like to a shareholder of these 3 companies. Actaully, I bought the stock and immediately placed a request for the Annual Report. To my amazement, before the shares were credited into my account, the Annual reports were there on my desk. In this context, I must always mention about foseco India. I wasnt able to get their e-mail address in India... so I mailed it to London. And the company had so much responsibility that they acted so very fast and fulfilled my request in no time.These are true Investor delight stocks.

 

5.Another important thing to look forward is to see how quickly the management is able top present its account and hold the AGM. A good management will always like to present accounts and hold the AGM very much before the stipulated guideline.Good companies like to interact with the shareholders and investing community. They therefore hold the AGM when its convenient for the shareholders to attend the same. They dont avoid the investing community by holding the AGM at the dead-end of September( for March-ending companies) so that they can avoid getting questioned as not many investors will be able to committ the time and effort.

 

6.Understand the Policies which the company has laid down, if at all. Policies like Whistleblower Policy, dividend policy are often laid out as a measure to maintain high degrees of standard of Conduct. Companies which have a well-laid out policies will be coveted in most of the cases.

 

7.Try to peek through the chairman's Letter if that's provided. Try to get a feel of the humility of the Board Chairman. Try to make a note of his intent, if you can. Sir, Investing is such a game which will make you a behavioral scientist if you take it seriously.Understand their communication. Its very very important to get a feel of the management before diving hard into financials, which is a matter of science and more easily understandable.

 

Gradually, I will like to write more and more stuff on Financials but just thought it important that before one gets into financials one must make some mental notes about the management quality and hence this post.

 

Regards,

Vivek