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Reading a Company’s Financial Statements

Any company’s financial statements across the world, are presented in the most boring document called “The Annual Report”. It is the antithesis of a suspense thriller unless you are a banker who has lent huge money to the company for a very long tenure. In fact, I prescribe it as the surest cure to insomnia. I also provide money back guarantee, if you don’t fall asleep by the 6th page itself.

Jokes apart, annual report is the most comprehensive report on company’s performance, its financial health and the cash resources that the company has with itself, at a given point in time. And since I said in the first para, that it is boring, there is an approach to read it.

Don’t start from the start. Don’t jump to balance sheet either. The best way to start reading the company’s financial statements is to start by reading, “Director’s Salary”. I got you again.

For listed Indian Companies, they have a section, called “Management Discussion and Analysis (MDA) “of financial statements. SEBI (Securities & Exchange Board of India) makes it mandatory for Indian companies to provide the top management’s view on financial statement of the company. In this section, the board writes about the economy, industry, the competition, company’s performance for the period presented and much more. In fact, if you take up an industry and read the MDA for five companies of that sector, you would get a wholistic perspective of how it functions.

The same information can be found in, “The Directors Report” for foreign companies. By knowing this information about your sector, you come across as a person who knows his stuff. This, I would also classify as smart work, since this section is not more than 10 % of the total annual report. This is the essence that one must read.

They say that respect is earned and not demanded. Equipped with this information, I am sure, in your company meetings, people would come across and say, that this person doesn’t open his mouth much, but whenever he does, he makes sense.

For more insights about related topics on finance and to be on top of your business finances as well as numbers:

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For any finance related queries or experiences / learning similar to the ones described above, feel free to write to me at vishal.thakkar@contetra.com or drop a message on my LinkedIn inbox.

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  • JAK


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