How to Read Annual Reports: A Beginner's Guide to Key Sections

Let's be honest—looking at annual reports can feel overwhelming! But if you know what to focus on, they are full of useful insights that can help you trade better. Today, let's try to learn about a few of the important sections:

📊 Spotting Valuable Insights in MD&A Section

The annual report's Management Discussion & Analysis (MD&A) Section details the company's performance, trends, and strategy. MD&A includes macroeconomic trends such as GDP growth, inflation, and interest rates.

Real Example: Infosys' MD&A section in annual report includes that global GDP growth slowed to 3.2% in 2023, with IT services spending at $1.4 trillion and increasing focus on AI investments.

💪 Checking for Current Stability

Annual reports include a key financial ratios section which can be used to assess the stability of the company.

Liquidity Ratios:

• Current ratios and quick ratios can be used to assess a company's ability to meet short-term obligations
• Calculate Current Ratio = Current Assets/Current Liabilities
• If the ratio is above 1, the company can meet its short-term obligations

Solvency Assessment:

• Assess solvency ratios like debt-to-equity ratio and interest coverage ratio
• Calculate debt to equity ratio using Total Debt/Total Equity to analyse the debt obligations
• A higher ratio will signal to rely on more debt

📈 Find Growth Potential

Capital Expenditures (Capex):

• Check under the Investing Activities section of the Cash Flow Statement
• An increase may signal new infrastructure or expansion plans
• Example: Ashok Leyland's FY23-24 annual report shows a Capex of ₹481 crores for the acquisition of fixed assets

R&D Investments:

• Check for Research and Development (R&D) spending
• High R&D spending often indicates upcoming product innovations
• Example: Sun Pharma's R&D focus could hint at the launch of new drugs

Is this it?

Not at all. These are NOT the only things you should look at. Till the next one is up on our page, comment and let us know what about annual and quarterly reports do you find complicated and we would be more than happy to decode that for you.

Till then, Happy Learning and Happy Trading :)