Dear Investor,  

I will ask you a simple question. Assuming you have Rs 1 lakh with you that you want to invest in the stock market. Where will you invest?  Either it is stocks or Mutual funds or any other financial assets. People invest in a particular stock for various reasons. Everyone has their own investment rationale.  If you are investing with the help of i that’s a different story.
 
Let’s assume that there are four people who invest in the stock market, namely A, B, C, D.   

A invests in a stock by conducting his own research 

B invests in a stock by listening to others’ advice 

C invests in a stock by looking at the price and getting attracted to that stock 

And D only invests in stocks that are advised by a SEBI-registered investment advisor like Savart.  

So, if you fall into any of the first three categories, D is an exception as investment advisors will do fundamental analysis, you all need to follow a common principle.  Never invest in a business that you don’t understand. Even Warren Buffet suggests the same.  

But how will you understand the business of a company?  

When it comes to making informed investment decisions, relying on credible and comprehensive sources of information is crucial. Investors often turn to research reports or take advice from influencers, but the cornerstone of any thorough analysis should be a company’s annual report.  
 
The Annual Report provides a detailed snapshot of a company’s financial health and operational strategy, which is indispensable for anyone serious about investing.  

Many investors don’t even consider annual reports because they look complex. Instead, they opt for ready-made research reports that might miss out on critical details or have inherent biases.  Even many people are making losses in their investments. Why do most investors fail, and how can you succeed? Sebi also released a study in which they mentioned about losses people are facing in the stock market.

People also consider technical analysis while investing. For those who don’t know about the difference between fundamental analysis and technical analysis, here it is:  

  • Fundamental Analysis: This involves evaluating a company’s intrinsic value by examining its financial statements, management quality, business models, and competitive advantages. It’s a deep dive into understanding what makes the company tick and its long-term potential.  
  • Technical Analysis: On the other hand, technical analysis looks at statistical trends from trading activities, such as price movements and volume. It’s typically used for short-term trading strategies.  

Both methods have their place, but for long-term investment decisions, fundamental analysis—grounded in the data found within annual reports—is essential.  

So, before you realize the importance of annual reports and how they will change your investing style, let’s understand what an annual report is.  

What is an annual report?  

An annual report is a comprehensive document that publicly traded companies produce annually. It provides shareholders and other stakeholders with detailed information about the company’s financial performance and overall operations. Annual reports are primary source of information. Annual reports are unbiased and give a holistic view of the company’s performance and strategic direction.  

Let’s understand it in depth with the breakdown of each component:  

Business overview and leadership communication: This section is the primary section of an annual report and tells us about the company’s mission, vision, core values, business model, key products or services, market position, and competitive advantages.  

It sets the context for the detailed information that follows in the next section. It helps you understand the company’s foundational goals and how it positions itself in the market.  

Management Discussion and Analysis (MD&A): This section gives a lot of information and insights about the company. Management’s detailed analysis of the company’s financial and operational performance over the past year, including discussions on revenue, expenses, profits, and other key metrics.  

This section offers insights into the company’s future, strategic initiatives, and expected market trends. It’s where management outlines how the company intends to navigate upcoming challenges and leverage opportunities.  

The board’s report to shareholders: It is a formal report covering the board’s activities, governance practices, and compliance with and adherence to regulatory requirements. This section also provides insights about corporate governance practices, corporate social responsibility activities, risk management, and regulatory compliance.  

This report ensures transparency and accountability by highlighting key achievements, milestones, and significant events from the last year. It helps you make informed decisions by giving insights into the company’s operations and future plans.  

Auditor’s Report: This report is not made by the company. As the name suggests, it is from an external, independent auditor reviewing the company’s financial statements. After reviewing the financials of the company, the auditor will share his opinion. This opinion is a crucial point that you need to focus on.  

This section will help you understand the risks involved within the business and the financial discrepancies of the business. There are different auditor opinions, and everything signifies the exact position of the company. This opinion of the auditor will give us a clear picture of the financial situation.  

Financial Statements: These are a set of financial documents that show the company’s financial status at a specific point in time, including the balance sheet, income statement, and cash flow statement.  

Before investing in any company, we need to understand the business, and then we need to figure out whether it is a profitable or loss-making company.  

These are the sections in an annual report. If you read all the sections of the company’s annual report, you can decide whether to invest in it or not.  

Now that you are aware of the various sections of an annual report, and understood its importance in the process of investing, the next logical step is to learn to analyze an annual report such that each of these sections collectively make sense.  

Worry not! Checkout this course on “How to Analyze Stocks Using an Annual Report?” On Nirvana by Savart. Nirvana is a financial awareness arm of Savart, with the mission to make financial literacy and the power of investment management accessible to everyone.  


 
This course will cover all the sections of an annual report in detail, along with real-time examples of some of the listed stocks.  

However, if you do not have the time to do your own research, pace up your investing journey with a SEBI-registered investment advisor. The traits to lookout for in an investment advisor are transparency, long-term focus, integrity and research capability. 

The investment advisor can help you make an informed investment decision. Choose the best investment advisor, and only invest when you have faith in that advisor.  

Note that the role of an investment advisor is not limited to suggesting stocks for buying. They should be well-adept to navigate your investments through market volatility.  

If you learned something new today, share this blog with your friends and family.  

Disclaimer: Savart is a SEBI-registered investment advisor. The purpose of this content is to educate, not advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations. 

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