6 Key Words To Look Out For In Annual Reports
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- Updated 05 Apr 2023
Annual reports are very important sources of information when it comes to the overall performance of a company. However, these reports can be filled with financial jargon. This can be a bit problematic if you are unaware of the terms used. In this piece, let’s discuss a few important key words that you should look out for when you read annual reports..
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Assets and Liabilities
According to accounting standards all over the world, assets are those items owned by a company which provide future economic benefits. This can include cash, accounts receivable, inventory, equipment and land. Liabilities, on the other hand, are a company’s financial obligations. They are settled over a period of time through the payment of money, goods or services. Read more about assets and liabilities analysis here.
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Intangible Assets
These are assets that are not physical in nature. You cannot touch or see these assets in company’s inventory. Intangible assets can include brand recognition, goodwill or intellectual property such as patents and trademarks. For FY2018, Reliance industries already has high intangible assets under development equalling to Rs 8,960 crore in Jio and Rs 2,140 crore in Reliance Retail. Click here to find out more about intangible assets.
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Borrowing Costs
Borrowing costs are defined as interests and other costs that are incurred by an enterprise in connection with the borrowing of funds according to the Institute of Chartered Accountants of India (ICAI). That means any interest on short term loans or long term debt incurred by a company is included under borrowing costs. For example, Reliance Industries experienced a high jump in standalone borrowing costs to 7.1% between FY2012-15 as a result of high interest rate on loans and the interest component on supplier’s credit. Higher the borrowing costs for a company, lower its profits. Read more about how interest rates affect companies here.
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Free Cash Flow
FCF is a measure of how much cash that a company can generate after it accounts for capital expenditures such as buildings and other assets. It is a good indicator of a company’s financial health and performance in the market. A company that has excess cash can utilise it for various purposes like expansion of current projects, development of new products or payout of higher dividends to shareholders. Reliance Industries, for example, had a FCF of Rs 20,515 crore so far in FY2018. Read more about capital expenditure in the Indian economy here.
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Return on Average Capital Employed (RoACE)
The RoACE is a financial ratio that measures the profitability of a company with respect to the investments it has made. The formula for RoACE is as follows:
RoACE = Earnings before Interest and Taxes (EBIT) / (Average Total Assets – Average Current Liabilities)
This is an important metric because unlike fundamental metrics like Return on Equity (ROE), RoACE takes current liabilities into account. Read more about financial ratios here.
