How do you get information about a company? There are couple of options available, if you are a student. One is to go and check out the company’s web site and look for what they say. Tabs like ‘about us’ give enough information like start, key milestones and growth of the company to its present stage. Another oft-used short cut is to go to its Wikipedia page and get a plethora of information available online about the company. Now, how many have used annual reports as a source of information? An annual report can be pretty detailed about the kind of weather a company faces.
Why an annual report?
Annual reports are addressed to shareholders, who are real owners of the company. The report is presented by the Chairperson, highlighting key events and developments. It is therefore, a detailed first person account of organisational progress. If you have read a Chairperson’s address from an annual report, it is seen that it is addressed to ‘you’ the shareholder. It is about ‘your company’.
What information do you seek?
What is your idea of information about a company? Material facts may be hidden from a company web site, or a Wikipedia page where information is crowd sourced. You may find rosy pictures, subjective analysis and tall claims in the web site, whereas annual reports may contain more factual, objective and accurate data. One may find strategic decisions, reasons for such decisions and forward-looking assumptions on which growth projections are made, from an annual report.
Annual report is not just financial data
Many have this impression that annual reports are all about statements of financial nature. Nothing can be further from the truth. While annual reports do contain financial statements and analysis, they are not just financial statements. A student of strategy can look at annual reports as a reference point of strategic decisions and their timeline. Past reports will vouch for execution levels and results achieved.
A human resources person can look at it from the perspective of gender diversity, remuneration of key personnel, attrition levels, appraisals and human resource development. A student of business ethics can look at the structure and composition of directors on the board. Dig a bit deeper, and you may find possible examples of related party transactions, conflict of interests among board members and much more.
A marketing student may analyse marketing plans and their execution, level of competition, positioning and integrated marketing communication strategies. A finance student may study ratios derived from it, year-on-year growth, cost of marketing campaigns and their returns, manpower costs and projections, employee stock options and so on. A simple study of EBITDA will give you inputs on core competence and operating profits. Compare performance of a few years, and you know whether the company is a cash cow or a star.
Management discussions and analysis
If I were a student, I would certainly have a go at this part. This is where macro-economic scenarios, corporate performance and strategic discussions are recorded. You may even see a SWOT analysis, making it further simpler. You may find resonance of a corporate philosophy or organisational culture here. One can also spot ambitious plans and projects, which may not be available for public consumption.
How to go through an annual report?
Whenever you study an annual report (even from a purely academic perspective), view the company as your own. Would you stay invested as a shareholder in the foreseeable future? If yes, why, and if no, why not. Try to find answers for these. If you look at a company as a third party without any interests in its performance as a corporate citizen, you may not find much information.
Imagine that it is your money which is invested. Will you look at returns as dividends, or as capital appreciation of your investment, or both? Are you happy about the leadership team (the executive)? Are you happy about the journey so far? Are they transparent as they should be? If not, what can be done? Are they adding value to your investment? These are some ways through which you can take out meaning from those (seemingly boring) pages.
(The writer is Associate Professor, Kochi Business School.)