How to read annual report and management analysis?

Hi Seniors,

Please guide on:

How to read annual Report and what to analyse in it?

How to analyse the management and its promoters?


Dear Mahesh
Recently I opened a thread, designed to cover from investment philosophy, financials, moat, management, valuation all.
Currently I am at stage of explaining financials.

Do let me know if you want to see something else.
Saying that my knowledge is only 20-30%, I must admit…probably less than that.
By the way Merril Lynch had launched a “how to read financials”…on US style financials.

There are few good books as well, the problem is academic heavy. Please let me know, I can reply back with names.

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What all you can expect me to write after financials

Investment Philosophy (KYF- Know Yourself First)

Investment Philosophy (Personal Financial Planning)

Investment Philosophy- (Popularity may be illusion)

Investment Philosophy (CAP Plan- Capability Building, Active Investment Management, Portfolio Management)

The Value Investing

Building Nest (Portfolio seedbed)- allocation, comfort, security, entry and exit.

CBR1 – Competitive Advantage

CBR 1- The Competitive Strategy

CBR 2- Quality of Management- The Person

CBR 2- Quality of Management- Performance

CBR 3- Risk Management- Financials

CBR 3- Risk Management- Operational

CBR 3- Risk Management- Compliance

CBR 3- Risk Management- Strategy

CBR 4- Future Catalysts- Business

CBR 4- Future Catalysts- Management

CBR 4- Future Catalysts- Industry

CBR 4- Future Catalysts- Markets

CBR 5- Margin of Safety- Understanding Price

CBR 5- Margin of Safety- Psychological Valuation

CBR 5- Margin of Safety- Business Valuation

CBR 5- Margin of Safety- The Safety Net

CBR 6- Special Situation- Subsidiary

CBR 6- Special Situation- Merger and Acquisitions

CBR 6- Special Situation- Demerger

CBR 6- Special Situation- Wishful Thinking

CBR is Concentration Band Requirement (band is a section of business risk which needs to be managed within a portfolio).
Case Studies – Ten Companies (Sick- Commodity, Hot Guys-IT/Ecommerce, Cross Road- Auto, Evergreen- FMCG, No Choice-Pharma, Aspiration- Housing Finance, God father- Banks, Curiosity- Travel, Borrowed Conviction, Not So hot)

Establishing KPI for Portfolio Management- track portfolio

Opportunity Sourcing- Moat based

Opportunity Sourcing- Low Valuations

Opportunity Sourcing- Thematic

Opportunity Sourcing- Borrowed

The Behavioral Finance

The BUCK STOPS HERE (Philanthropy)

Unlearning- Sector Thinking

This is something practice, not sure if I missed out something else.


Hi Suvi,

You have started amazing thread and i’m following that regularly, thanks for the thread.

I have very little knowledge in analyzing a stock and too much confusion also while practically analyzing a stock.
Just want to know with examples that how to do Annual report reading and management analysis.

thanks for the reply.

No Problems Mahesh
I am planning to cover financials in detail, may take sometime. As these require detailed sense.
Till that time if you have a stock to analyse immediately, I propose following questions for you to analyse:

First is DNA of growth:
How did the company grow, fundamentally there can be 3 or 4 ways a company can grow:

  • by selling more products or services (quantity)
  • by increasing price
  • By acquiring another company
  • by adding new products or services to offering
    (Refer, Five Rules of Successful Investing by Pat Dorsey)
    Quantity you will get it from AR, sale value you know. Plot them over 10 years (that will tell you pricing power, sale value/quantity). Use dispatch quantity. This number may be slightly distorted, but it will give you what you want for now.
    Again from quantity you can figure out whether quantity is going up or not.
    For acquisition refer to BSE circulars, it will tell you exactly how much to normalise.But again acquisition is an exception case.
    Last one is bit tough, google, website, AR…hunt down if there is a new offering.
    This won’t work for services company.

Next is ask yourself what is the quality of this growth.
The best is see whether increase in EPS has come from organic growth or buy backs, or even net margin has been manipulated by adding other income.

Profit ability
Return on equity is most powerful tool. Use DUPONT (google it) it will split ROE to margin, asset power and financial leverage.

Free cash flow
Put 6-7cash flow statements side by side. See where the capital is utilised e.g. buy back of shares, growth capex, reinvestment to profit.

High ROIC, check with Debt equity. High ROIC with low debt indicates company is able to make lot of earnings from reinvestment.

Debt and liquidity
Short term- working capital, cash conversion cycle, interest coverage, interest to cash flow.
Long term- debt equity, debt to assets, loan maturity schedule
Current ratio and quick ratio

Make a negative or bear case, what can go wrong with all these.
Problems is abstracts may not help unless we are not able connect the dots with business. That would require bit of heavy explaining.

Pardon me if I went through quick.


Dear Sir,
Would you have any mechanism to evaluate financial entities like banks and housing finance corporations? What are the KPIs to be considered and how does one go about finding them?

Let me try to cut the story short:
First lets not try to club Housing finance with banks, hope you will agree.
Let’s talk about banks:

Without expanding further Banks are bank is an essential service, hence chances of liquidation are remote but still can happen!

There are three type banking mainly:

  • Retail banking (deposits and lending to retail)
  • Commercial banking (deposits, lending, other syndication to corporates)
  • Investment banking (market instruments, special activities, exotic assets)

The bank has to earn a spread (the rate charged on lending have to be higher than deposit) to start with! The spread income is called “net interest income”.

Banks biggest strength is diversity, look out for guys with diversified portfolios.

Ability to attract low cost funds, higher deposit to lending ratio is better.

Now this is the significant to me:

Banking industry is all about risk management. A reading of BASEL III would help further.

Banks generally face three type of risks:

Credit- or what you call NPA. Analyse the loan categories if available with NPA percentage, geographical NPA out reach. Here you may not get from annual report, check RBI sites and other places. To understand the route cause of NPA i.e. due to aggression, location, asset type etc. I always take out NPA from interest, that’s the reason not being investing to banks despite being a die hard banker for few years. Try to tie reason for credit risk to - diversification, account management, collection procedures, asset type. Compare NPA with others but basis classification e.g. asset type, diversification etc.

Interest: if a bank is deposit heavy then rising interest rates will hurt them. If it is lending heavy it will work reverse.

Liquidity- check the liquidity and other value add services. This is like factoring, cash credit and other services as Bank Guarantee. These are nothing but contingent or promise. If your probability is dismal banks can earn a big chunk of money here.

I want to write more, let me freeze with a list of entry barriers:

  • banks are obviously where action is,enormous balance sheet requirements.
  • banks operate in large areas, with large network.
  • some places they create oligopoly. For example UCO Bank was doing well in East where as Indian overseas bank in south.
  • banks enjoy switching cost. For example your bank number is given for EMI, income tax purpose, aadhar number is linked and so on. You wont kick out a bank just for the shake of 100-200 rupees a year. Bank knows this and they always add a teaser price.

Sometime, let us cover bank separately.


Hello Suvi,
Thank you for the heads-up. Banks and HFCs are currently not in my circle of competence, so I will read the material that you have suggested. Thank you very much.

For your info, I use Safal Niveshak’s Stock Analysis spreadsheet and it is extremely useful for me to lay threadbare the financials of manufacturing companies, but unfortunately it is not suited for analyzing financial companies.

Best Regards,
Balaji Srinivasan

Dear Balaji

If you give a permission to express my view, why don’t you do a circle of competence exercise if you haven’t done it. I posted some time back with a exercise note.

Trust me there are abundant choices within each circle.



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From where i can get the safal niveshak analysis spread sheet

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If a checklist helps you, attached is a demo checklist with guidance.

Let me know questions if any, I had used few books to compile this but back in 2011.

My current checklist is bit experiment hot spot, will confuse others with so much of corrections here and there.

Demo Checklist.xlsx (27.9 KB)


This checklist is useful and exhaustive. You seem to be having exceptional writing skills and urge to help others!!! Hats off to you for taking your time out and writing to help fellow investors in deciphering various topics…

awesome writeup, You have seriously got amazing writing skill.

Hello Mahesh,
You may find the spreadsheet here -

Best Regards,
Balaji Srinivasan

Hello Suvi,
Your CoC post is brilliant. I must confess that after reading it, I can say that I can reasonably understand the business of just two companies among the 30 or so that I hold. The two are NESCO and NTBCL. Thanks again.

Best Regards,
Balaji Srinivasan

Dear Balaji

Circle of competence is a huge block for anyone as the subjects are diverse. This is where forum like Valuepickr works like explosive network effect. It brings several diverse people on one table.

If people can start writing industry hand book from investment perspective based on experience it can cover the whole gamut. The hand book that is available in sites like investopedia is too little and generic.

If I get opportunity in future will cover few industry which I know of.

Regards and Wishes