Stock Market · Fundamental Analysis

Reading an annual report

Most annual reports are 200–400 pages. Nobody reads all of it. Here's what to actually focus on.

The mandatory sections

1. Chairman's/MD's Letter to Shareholders: management's own view of the year, what went right, what didn't, and forward strategy. Read this critically. Compare with last year's letter. Did they deliver on what they promised?

2. Financial Statements: P&L, balance sheet, cash flow. The numbers don't lie as easily as words do.

3. Notes to Financial Statements: where accountants hide important information. Revenue recognition policy, contingent liabilities, related-party transactions. All disclosed in the notes.

4. Auditor's Report: look for any qualifications (concerns raised by the auditor). A 'clean' report is expected. Any qualification is a red flag.

> "Check what management said last year, then check what happened.". A fundamental analyst's shortcut to assessing management quality.

Red flags to look for

• Revenue growing but receivables growing faster: cash not being collected, possible fictitious sales
• Frequent changes in accounting policies
• Auditor resignation or change without clear explanation
• High related-party transactions
• Goodwill write-offs

Where to find annual reports

• Exchange filing portals: Corporates → Annual Reports section
• Both national exchanges publish these under corporate filings
• Company's investor relations page
• Fundamentals aggregator sites compile this data from annual reports

10 yearsLook at 10 years of financial history before any long-term investment

Takeaway. Read the Chairman's letter, check auditor qualifications, and verify notes to accounts. Particularly related-party transactions. Compare management's promises to actual delivery over years.