Annual report analysis Involves a review of an organization’s annual report to gain an understanding of the organization’s situation.
This analysis also involves the interpretation of financial and non-financial data of the organization.
WHAT ARE ANNUAL REPORTS?
Annual reports are comprehensive documents designed to provide readers with information about a company’s performance in the preceding year.
We need to note that annual reports are not the same as financial reports.
While financial statement focuses on the financial and quantitative aspects only. The annual report contains both the quantitative and qualitative aspects of the report.
Furthermore, the annual report contains much more than mere financial statements. It has a broader scope and in addition to quantitative financial information.
It includes qualitative information such as letter from the CEO of the company, directors’ report, chairman’s statement, sustainability report etc.
Therefore, it is important to understand the financial and non-financial sections of the annual report for proper analysis.
Firstly, before we go into the analysis, let us understand the details.
WHAT ARE FINANCIAL REPORTS?
Financial reports are written records that convey the business activities and the financial performance of a company in a given period.
A financial report shows the financial summary of an organisation in a given period
It is the overall end product of the account process. It is also known as financial statements.
In other words, a financial report is the whole information of the accountability of the company. It tells how the managers used the resources available.
Thus, the financial activities are summarized in the financial report periodically.
The five key financial reports that you will find in the company’s annual report include:
- Statement of Financial position
- Statement of Profit or loss and other comprehensive income.
- Statement of shareholder’s equity
- Cash flow statement
- Notes to the account
NATURE OF FINANCIAL REPORTS
- A financial report is historical in nature.
- The report shows transactions that are expressed in monetary terms.
- It records only financial transactions.
- It is based on certain accounting concepts, conventions and principles.
BENEFITS OF FINANCIAL STATEMENTS
Financial Statements are useful for the following reasons:
- To assist management in taking effective decisions relating to the firm objectives and overall strategic
- To know the current position of the firm in terms of assets, liabilities, equity, expenses and incomes.
- To track financial results on a trend line to spot any looming profitability issues.
- To show stewardship. How an organization is utilising and managing the firm’s resources.
- To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.
- To assist management in planning, monitoring and controlling,
- To disclose information about an entity’s economic resources.
- To facilitate statutory audit
LIMITATIONS OF FINANCIAL STATEMENTS
There are a few downsides to issuing financial statements. A possible concern is that the report is historical. Hence, most of the time the report does not represent.
WHY ANNUAL REPORT ANALYSIS?
Stakeholders at different levels need annual report analysis for various reasons.
Firstly, it help generate ideas and take investment actions.
Secondly, they help identify red flags and early signs of trouble when everything seems to be going well.
In summary, annual reports act as an anchor to your investment decision.
Therefore, it is highly important to analyse the report and consider the key indicators before making the big decision.
Thanks for reading.