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Check company’s financial health before investing
Finance - Fundamental Analysis

IT is that time of the year when investors start receiving the most critical communication tool from the company, namely the annual report. An annual report provides a summary of how a company has performed in the year that went by, and how it is likely to perform in the forthcoming year. For companies, it is mandatory to send a hard copy of the annual report to each and every shareholder. While a lot of shareholders merely keep annual reports aside or throw them away with old newspapers, there are important cues which savvy investors pick. In fact, for the general public, the annual report is the only financial document that they get to see. Hence, for existing shareholder, it could be the best source of information to determine the financial health of a company and to learn about any problems or opportunities in the business environment. Here are some important things that you could look for in a balance sheet.

Look And Feel Of The Annual Report

Balance sheets can be designed in any shape and size. Also, there is no mandatory rule which specifies the quality of paper to be used in an annual report. Hence, while some companies come up with a plain vanilla annual report with simple fonts, simple colours and pay little attention to page layouts and displays, there are companies which use high quality paper, take special efforts to design it and ensure that the annual report is really presentable to their shareholders. How the annual report looks and feels conveys its image and speaks volumes about the ability of a company to market itself in the corporate world. Quality of paper used in the annual report, many a time, is proportionate or signifies how well the company is doing. Sending the annual report by courier or speed post, as compared to ordinary post, could denote how important an investor is for the company.

Management discussion and analysis

This section is of prime importance for research analysts as well as fund managers. It gives you an overview of the previous year of operations and how the company performed. Besides this, most importantly, the management shares its vision for the coming year, updates on projects which are in the pipeline and thoughts on future projects. However, investors should keep in mind that unlike the numbers, this section is unaudited. Management discussion and analysis is very important to me in case of multinational companies, where there is less communication by way of conference calls or analyst meets during the year. This section gives you important clues as to the direction in which a company is thinking, how they think the year ahead is going to be for the industry and how the company will fare.

Financial statements and strength of balance sheet

Shareholders like to look at the income statement as it denotes how the company is performing in its business, how much profit the company is making and what is it earning from its core operations. Portfolio managers and analysts are concerned about the strength of the balance sheet. Look at things like inter-group loans, investments, cash and debt position in the balance sheet prior to making an investment decision. There are things like auditors qualification, or one-off expenditure which raise a red flag and need to be considered further by analysts. Then, there are things like cash flow statement which is sacrosanct for most analysts.


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