Fiscal 2024-25 is behind us—have the annual reports started landing in your inbox yet? If the words bring to mind a 10-MB, 500-page PDF you open only to grab the P&L or balance sheet, you’re not alone. In a world brimming with investor presentations and earnings calls, the annual report may seem old school. But don’t be fooled—it’s a goldmine of insights that deserve attention.
From what the top brass earns to where the profits lie, debt levels to future bets, identifying hidden value to unearthing the accounting scams that Dalal Street could be missing — the annual report covers it all. Legendary investor Warren Buffett put it best: “I don’t think we’ve ever gotten an idea in 40 years from a Wall Street report (brokerage reports). But we’ve gotten a lot of ideas from annual reports.” He even likened it to a trusted business partner’s annual recap—everything that happened and what lies ahead.
If you’re eyeing a stock, this document is your best starting point. It combines audited financials, key disclosures, board commentary and footnotes that often reveal more than headlines ever will. For the curious and patient, every number and footnote tells a story – sometimes of growth, sometimes of caution.
Here, we decode the annual report for you. While reading the financials is a given, we highlight what to read and what to question. So, the next time you open an annual report, it won’t feel like wading through jargon.
Audit report
Before diving into the more nuanced parts of the annual report – like notes to accounts and the Board’s Report, it’s worth pausing to appreciate that the numbers in an annual report are audited. This makes them far more reliable than other publicly available data, such as quarterly updates. While quarterly results undergo a limited review, annual financial statements, namely the balance sheet, P&L, cash flow statement and accompanying notes are audited with a higher level of rigour. However, visual elements like charts showing adjusted EBITDA are not audited, so treat them cautiously.
A key section that investors must never miss is the Independent Auditor’s Report, where the auditors share their opinion on the financial statements. Always give this a quick read before jumping into the numbers.
Ever wondered why the assets in the balance sheet are presented in the inverse order of liquidity? Why do financials of companies, though from diverse sectors, look alike? This is because, they are mandated to be so by the Companies Act, 2013, and Indian Accounting Standards (IndAS) – which together form the law governing financial statements. Uniformity aids comparison. While the management prepares the accounts, the auditor checks if they’ve followed the law to the T.
Publicly-listed companies usually receive one of two types of opinions: unmodified (clean) or qualified. An unmodified opinion, found under the “Basis for Opinion” and “Opinion” paragraphs, means the auditor found no material misstatements. Most listed firms receive this.
A qualified opinion, on the other hand, means there are specific misstatements, but they’re not pervasive. For instance, SpiceJet’s FY24 audit received a qualified opinion after it failed to deposit TDS, GST and PF dues on time. It also hadn’t provisioned for penalties, as the outcome of its ongoing regularisation of non-compliances were not evident. The qualified opinion signified the absence of provisions in this regard. The auditors further warned that continued losses and negative net worth raised concerns over its ability to remain a going concern. Red flags like these should make investors think twice. Having turned profitable in FY25, readers can follow up on what SpiceJet’s auditors have to say.
CARO report
Besides, auditors are also required to report on a few other aspects in a 21-clause report called the CARO (Companies (Auditor’s Report) Order) report. In case the company is found to be in non-compliance, the details thereof will be reported. This can be found in the annexures to the audit report on the standalone financial statements. While this report is applicable for consolidated financials too, it would not be presented in full. Only the violations, if any, will be summarised. Here are a few key items worth scanning as essential hygiene checks.
* Clause 7 – whether undisputed statutory dues such as PF, TDS have been deposited regularly
* Clause 9 – whether the company has defaulted on loans, whether funds raised on short-term basis have been used for long-term purposes, etc
* Clause 10 – whether capital raised in an IPO were used for the stated objects. This is a must for companies that recently went public
* Clause 11 – whether any fraud by the company or any fraud on the company has been reported
* Clause 13 – whether transactions with related parties are as allowed by law
* Clause 15 – whether non-cash transactions with directors of the company (transferring company property to a director, for instance) have been done in accordance with law
* Clause 19 – a comment on the company’s near-term solvency (next 12 months)
Notes to accounts and schedules
One of the biggest advantages of the annual report is the notes to accounts, which explain the what, how and why behind every line on the balance sheet and P&L. If reading the main financials is like doing a blood test, analysing the notes in conjunction with the financials is like full-fledged master check-up. They are the foundation on which the financial statements rest. Each line item is tagged with a note/ schedule number. Often, notes reference other notes, making navigation tricky. To stay on track, keep the annual report open in multiple tabs—one for the face of the financials, others for the notes.
That said, let’s dive into some of the notes that can come in handy in your investment decisions.
Investments in group companies: Before diving into the line-item notes in consolidated financials, you’ll find a company overview note. This section typically lists all group entities – subsidiaries, joint ventures and associates, whose financials are consolidated with the parent company, along with the parent’s stake in each. If not detailed here, you can find it in Form AOC-1 or in the Business Responsibility and Sustainability Report. This information is vital for investors evaluating non-operating holding companies such as Bajaj Holdings & Investment, Pilani Investments & Industries, Kama Holdings, etc.
With this data, investors can compare the market cap of the parent (A) to the market value of its stakes in listed group companies (B) (which are not consolidated). The gap between B and A (after reducing value of A by any debt on its books) is known as the holding company discount, which can vary anywhere from 20 to 90 per cent. A wider gap might signal undervalued potential yet to be priced in by the market. bl.portfolio has in recent years highlighted underlying value in many such non-operating holding companies. Investors must also check the schedule of investments to assess all other equity holdings and look for any value unrecognised by market.
For those who use the P/B ratio: Many investors use the price to book value (P/B) multiple as a valuation tool. Before using it, there are a couple of things to check. You see, the accounting standards give the choice to the company to measure property, plant, equipment and equity investments to be measured either at cost or at fair value. While most companies follow the cost model, there could be some which could use the latter for shares, land and buildings. This could be a problem when such assets constitute a substantial part of the total assets. Why? If the target company follows the fair value model and its peers the cost model, using the P/B multiple of peers as a reference could be misleading, especially when these assets have an upward revaluation bias. Ensure the accounting treatment followed by companies you pick for comparison is uniform, else adjust for this while using the P/B metric.
Details on borrowings: The note on borrowings has valuable information on the source of borrowings (term loans, NCDs, external commercial borrowings, etc), the interest rate and the collateral provided for securing the funding. It also houses information on the repayment schedule, which could come in handy when estimating future free cash flows to equity.
Revenue breakup: Most companies today report the revenue breakup by product, segment, geography and so on in investor presentations. But in case your company doesn’t provide the presentation, there are high chances that you could find revenue breakup in the note on revenue from operations.
Accurate measurement of cash: Cash and cash equivalents (like bank balance) are an integral part of calculation of enterprise value. If you just go by the line-item cash and cash equivalents, and assume that’s all the cash the company has, you would mostly be wrong. Why? Because term deposits not maturing in the next 12 months can be found under ‘balances with banks not forming part of cash and cash equivalents’ and liquid investments such as very short-term mutual funds and T-bills can be found hidden under the note on current investments. Make sure to consider them in your calculation of cash.
Also, if you find such cash to be excessive for the company’s business model, try and find why from other sources like the con-call transcript. Sometimes, companies might like to be conservative and build their cash reserves. If the company is unlikely to make acquisitions, eventually some or most of the cash is likely to be returned to investors in the form of dividends and buybacks. This happened in the case of large IT stocks starting 2017-18 and contributed to their valuation re-rating.
Accurate calculation of variable cost: For manufacturing concerns, costs such as power, fuel, packaging and freight expenses are variable costs. But these costs can be found only under the breakup of other expenses. Similarly, business promotion expenses and R&D expenses are integral to the business model of FMCG and pharmaceutical companies respectively. Make sure to include them in your model when forecasting margins as changes to these have an impact.
Trade receivables ageing: The trade receivables note is bound to have information on how much of trade receivables have been overdue for how long. If a bulk of the trade receivables are in the long overdue buckets, you will have to dig deeper – whether this is a common phenomenon in the industry, who the company’s customers are – government or otherwise, if the company was doing this to inflate revenue.
Board’s report and MDA
An important section not to be missed is the board’s report and the accompanying management’s discussion and analysis (MDA). The board’s report has enough information on the trends in the economy, industry and in the company. Financial performance highlights during the year, key acquisitions and analysis of financial ratios are a mainstay in most reports. Companies tend to evaluate themselves here in a SWOT (strength, weakness, opportunities and threats) matrix. This is a must read.
The MDA section follows the board’s report, and most companies take the popular mode of analysing the growth and decline in each financial statement line item.
Reading this section is crucial, more so for a few small-cap companies that neither publish con-call transcripts nor investor presentations. For instance, Kovai Medical Centre & Hospital, a small-cap healthcare provider does not publish transcripts and presentations. However, interested investors can go through the MDA for KPIs such as bed occupancy rate, average length of stay per patient admitted and average revenue per occupied bed (ARPOB).
Other items
In addition to the above, annual reports are mandated to contain a few more useful information as follows. Companies must disclose the ratio of directors’ and key managerial remuneration to median employee pay, along with growth in both, in the annexures to the board’s report. The absolute value of managerial remuneration though, can be picked up from the note on related party transactions. Though legally valid, if a CEO is taking home 3-5 per cent or more of revenue as salary, you need to discern whether it is justified, or investor interests are compromised here.
Next, most companies follow the integrated reporting framework – which includes commentary on six capitals – financial, manufactured, intellectual, human, natural and social capital. For manufacturing firms, key production data can be found in the manufactured capital section. For instance, Mahindra & Mahindra lists down the location of its facilities, production milestones and an upcoming battery manufacturing facility. For IT companies, intellectual capital and human capital can be looked up. TCS’ human capital section talks about the headcount, attrition, fresher additions, etc, while its intellectual capital talks about the number of patents filed and granted.
Companies are also mandated to include a Business Responsibility and Sustainability Report (BRSR). It, inter alia, houses all key information a person getting to know the company for the first time would want to know, such as year of incorporation, products and services offered, location of operations, exports as a percentage of revenue, the customers it serves, gender data of the workforce and so on.
Annual reports also contain Form AOC-2, which mandates companies to list down transactions not done on an arm’s length basis.
These and more, annual reports are a treasure trove of data for investing nerds. Armed with this, investors can do their own due diligence and make informed investing decisions. Whether it was companies that got embroiled in accounting scandals or those that delivered multi-bagger returns, the early bird investors who spotted this mostly got their insights by deep diving into this very document.
If you have any questions on items in annual reports that you come across, please write to us at blportfolio@thehindu.co.in with your query.
Published on July 5, 2025
