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Annual report season: Things to watch out for
If you own shares of a company, you receive a booklet once a year in your post box. This is called the annual report. It is mandatory for companies to send a copy of the annual report to shareholders. There is information for record that could help you assess the annual performance of the company where you own shares.
Shareholders of Reliance Industries, one of the most valuable private sector conglomerate, received the report recently.
Annual reports are always an interesting read as they offer many important facts about the company, provided one knows where to look. However, many of us find these reports boring and we end up tossing them in the pile of newspaper junk to get some spare cash.
Here are few things you could read up:
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How are bubbles formed:This section gives you an overview of the year gone by and challenges that the company faced throughout the year. However, the report usually also speaks about the outlook for the company’s business going forward. This is important because as a shareholder, you need to know risks associated with the business of the company you have invested in. Mukesh Ambani, chairman of Reliance Industries, blames overseas market conditions for a mixed performance of the petrochemical business. He spoke about challenges ahead for the two flagship businesses, refining and petrochemicals.
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Management Discussion and Analysis (MDA):You must read this section as it gives an overview of all businesses that the company operates in and about the industry. A very detailed analysis of each of the businesses that Reliance Industries operates in is available in this section. This indicates the thinking within the company. For long, the stock market was looking to hear Reliance’s vision for the new retail and telecom businesses. The annual report for 2012-13 gives information on the vision that the company has for the two new businesses.
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Cash Flow:Reliance Industries generated a significant income from nearly Rs 80,000 crore cash it holds. The other income’ stood at Rs 7,998 crore in 2012-13. This is significantly more than Rs 6,192 crore in 2011-12. The company says in the annual report that it was due to an increase in cash flows from operations that were deployed in bank deposits, mutual funds and Government securities or bonds. The cash flow segment is generally ignored by most retail investors. Here, one must look at the cash flows from operating activities to see if the company is generating cash from its core business. In case of Reliance Industries, it is important to look at the revenue growth and profit of refining and petrochemical businesses.
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Remuneration to Key Management Personnel:The compensation package of the board and senior management is detailed in this section. Ideally, there should be a correlation between compensation to key personnel and the company’s profit. Mukesh Ambani has fixed his remuneration to Rs 15 crore per annum when shareholders have approved a compensation package of Rs 39 crore.
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18,308 crore
Reliance Industries gave loans and advances worth Rs 18,308 crore in 2012-13 to related parties. This is higher than Rs 10,243 crore in 2011-12. According to the annual report for 2012-13, there are 147 entities that are categorized as related parties. These are entities that could be step down subsidiaries of the company or set up by the promoter group.
