ET Markets Article - How to dig for gems of ideas in companies’ annual reports

You can read my latest article in ET Markets titled "How to dig for gems of ideas in companies’ annual reports" 

This is the time of the year when we as investors start getting emails of annual reports from companies where we are invested in. We start going through them one by one. I want to share some of the tips and tricks I have learnt over the years – some from my own experiences and some picked up from other senior investors - on how to read annual reports.

1.    Maintain a list of companies: Having a list of companies which I am interested in reading annual report for even when I am not a shareholder means that I get notified when it is published. I use screener.in and keep all such companies in the watchlist. I get an automated message which informs me when the company makes a BSE/NSE announcement regarding publishing its annual report.

2.    Cluster annual reports from the same industry: I make a folder on my computer and keep saving all the annual reports based on their respective industries. Reading annual reports of companies from an industry as a group gives a lot of insight into the competitive landscape, new developments, and differentiators for any one company. For example, when I am reading banking annual reports, I will read HDFC Bank, Kotak Mahindra Bank, SBI, Indusind Bank, Yes Bank, PNB (!!) one after the other covering both the private and PSU banks. Sometimes just looking at reports from the same industry helps in identifying the good and bad companies. Comparing management compensation, board composition across companies in the same industry also provides better insights than reading reports across multiple industries.

3.    Read reports of global leaders: While I am at it, I usually pick one or two global leaders and read through their annual reports. So, for the banking sector, reading Jamie Dimon’s letter in JP Morgan Chase or following the Wells Fargo annual report to understand how they are progressing to root out their mis-selling problems. In some industries, global reports can provide a glimpse of things to come. Google and Amazon annual reports are a must read for anyone who is interested in technology its impact on our day to day lives.

4.    Opening last 3-5 years annual reports together: With annual reports coming as pdf files, it makes it easier to reference the previous years’ reports. I tend to open the last 3 and sometimes 5 years reports in different tabs. Then when I am reading through say the management discussion and analysis, I will glance at what was written in the same passage last year or two years back. This helps me in understanding how the management commentary has changed over time. Is the same passage being copy-pasted every year? Are there same spelling mistakes every year? Has the management said something 3 years back and then not mentioned it ever again? Is the management in the habit of over promising and under-delivering or vice versa?

5.    Focus of Director’s report and MD&A: My main intention of reading an annual report is mainly to understand the developments and management view of the business climate. Secondary focus is on the financials, which I glance through at a high level. The director’s report and the management discussion and analysis help the most in this respect.

6.    Know what to look for: This is more important for companies in the portfolio and which I have been invested in for a long time. I am aware of the “story” in those stocks and know what to look for in terms of management commentary. For those where I am looking to invest, I take a more skeptical approach and try to drill holes in my investment thesis.

Annual reports are the primary source of investor information and reading them in a disciplined way gives a lot of information and insight on the workings of a company and industry.