Mar 13, 2012|
Do you skip these while reading annual reports?
The very prospects of hiring a new employee, getting married or seeking business partners compel us to have thorough knowledge of the individual we are to get associated with. Hence it is not just the curriculum vitae (CV) that we rely on. Background checks, references and high compatibility levels are necessary to help build confidence about our prospective choices. But why do these skip our checklist when it comes to making decisions for our financial well being? More often than not, investment decisions in stocks, even if independent, is solely based on a skimping glance at the annual reports. These annual disclosures are for a company what a CV is for an individual. One, the annual report is supposed to be prima facie reliable, exhaustive and most updated account of the entity's track record. Secondly, it is instrumental in making judgment about its possible future. However, as pointed out, a skimping glance may often prove misleading.
The accounting statements can certainly give you some quick ratios and growth numbers. The income statement, balance sheet and cash flows are therefore often the first contacts with an annual report. The management discussion and analysis comes a close second. For it at least tell us what does the company do. But equipped with the basic knowledge of business and financial performance, very few investors bother to dig deeper. But herein lays the pitfall. While the business model and financials of some companies could give sufficient warning of an impending disaster, that of many others don't. Satyam Computers being a case in point. If only investors had dug deeper into the logic of an IT company having numerous subsidiaries, rather than being content with its cash heavy balance sheet.
So to help you be on your alert, armed with nothing else but annual reports, we will list out some key disclosures in annual reports that should not skip your scrutiny. In this series of articles (Annual Report Screeners) we will not talk about the usual ratios and valuations, but other factors that will help you decide if the stock is compatible with your long term portfolio.
Screen 1: Related party disclosures
Indian Accounting Standard 18 requires companies to disclose transactions that the entity has had with directly or indirectly controlled companies, associates, joint ventures or individuals having ownership, voting power or significant influence on it.
The nature, volume and value of transactions are to be enlisted as per this disclosure. Hence transfer of goods, funds or even provisions made or written off against the said entities will appear under this disclosure. As a matter of corporate governance, companies therefore should cite irrecoverable loans, excess inventories with subsidiaries and associates
Since family controlled businesses represent almost 80% of the listed companies, their disclosures elicit special interest in this regard. These companies carry on their business through subsidiaries, associates and acquire interest in other enterprises. The transactions between these entities therefore offer important information about whether there is scope for siphoning off funds from the parent entity or tax evasion. One more instance where we can find these types of transactions are directors entering into transactions with the company to gain personal benefit. Higher transparency in this regard, could on the other hand, build confidence about the proposed investment target.
We will bring to your notice more such pertinent disclosures in the subsequent articles, that will help you screen companies and look beyond the obvious.
||Tanushree Banerjee (Research Analyst), is the editor of ValuePro, The India Letter, and Stock Select, Equitymaster's oldest recommendation service. She is also the editor of Equitymaster's most popular newsletter read by over 200,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks along with scrutinizing the RBI policies. And over the last decade, developed our research processes that have helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham and Joel Greenblatt.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Aug 16, 2017
And what it has in common with beating the stock market too.
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Aug 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407