- Annual Reports
How to Annual Report - Which Sections to cover?
Ever wondered how successful investors make informed decisions about which companies to invest in? The answer often lies in a document that many people overlook: the annual report. This comprehensive guide will transform you from someone who skips these documents to someone who uses them as a powerful investment tool.
Why Annual Reports Matter More Than You Think?
Think of an annual report as a company's autobiography – it tells the complete story of where the business has been, where it stands today, and where it's heading. Unlike financial websites that aggregate data from multiple sources, annual reports come straight from the horse's mouth, making them the most reliable source of company information available to investors.
Whether you're a current shareholder monitoring your investment or a potential investor researching new opportunities, annual reports provide unfiltered insights that can make or break your investment decisions.
Accounting Gimmicks & Spotting Red flags
Below are several accounting gimmicks and red-flag signals that a diligent investor can spot by examining a company’s last three years of financial statements and carefully reading the notes to accounts -
Michael Mauboussin on Amazon: Lessons in Expanding the Total Addressable Market
Mauboussin, known for his influential research on corporate value creation, uses Amazon as a key example of a company that continually redefines its TAM—not just by launching new products or services, but also by creating and seizing "option value," or new business opportunities that weren't originally part of its core model. GPU Server production: Nvidia AMD LLMs: Google Meta OpenAI
Unlocking India’s Water and Waste Infrastructure: Gaps, Data, and Opportunity
India currently has approximately 1,300 operational sewage treatment plants, while China boasts
between 20,000 and 30,000 such facilities—a disparity that highlights India’s significant infrastructural gap in wastewater management. This difference is particularly stark considering that India’s urban population is well over 480 million, producing an estimated 72,368 million liters per day (MLD) of sewage, yet only about 37% is actually treated before being released into the environment. By contrast, China’s robust infrastructure allows it to treat nearly 90% of urban sewage, significantly reducing environmental and public health risks.
This infrastructural deficit in India presents three major investment and development opportunities:
- Sewage Treatment Plants: Expanding the number and capacity of sewage treatment facilities is critical. The Central Pollution Control Board (CPCB) reports that over 60% of sewage generated in India goes untreated, polluting rivers and harming ecosystems. The sector is poised for high growth as governmental schemes like Namami Gange and AMRUT focus on wastewater management. Estimates suggest India needs at least 10,000 more plants to meet current demand and comply with global norms.
- Water Desalination Plants: With over 18% of the world’s population but just 4% of its freshwater resources, India faces acute water scarcity in many regions. Desalination offers a promising solution, especially for coastal cities like Chennai and Mumbai. While India currently has around 20 large desalination plants, China has over 1,000 operational plants with a combined capacity of over 1.5 million cubic meters per day. The potential for expansion is substantial, particularly as water stress worsens due to climate change and population growth.
- Waste Recycling Plants: India generates over 62 million tonnes of solid waste annually, yet less than 30% is scientifically processed or recycled. In comparison, advanced economies like China and the European Union recycle or treat up to 80% of their waste. There is enormous scope for increasing the number of waste recycling plants—especially for plastic, e-waste, and organic waste—as new government rules and incentives encourage private participation and innovation.
Signs of Excessiveness and Extremism
| Top Signs | Bottom Signs |
|---|---|
| 1. Large no. of IPOs | 1. No Mergers and Acquisitions |
| 2. Rapidly Rising Prices | 2. No IPOs |
| 3. Excess Leverage | 3. No new money for Venture Capital |
| 4. Availability of Credit | 4. Low Price/Sales and EV/EBITDA Multiples |
| 5. Over-optimistic Front Covers of Newspapers and Magazines | 5. Many Companies Trading below Book Value |
| 6. Very High Trading Volumes | 6. Very Low P/E Multiple |
| 7. Historically HighP/E and EV/EBITDA Multiples | 7. Central Banks eased for 6 to 12 Months |
| 8. Art and Luxury Markets Booming | 8. Recession Declared Officially, News is Stale |
| 9. Financial Press and Financial TV become Favourites | 9. Previously Favourite Sectors are Hated |
| 10. This Time is Different" Declared | 10. Credit only available to High Quality Borrowers |
| 11. Amateur Investors moveto Equity Asset Class | 11. Investors are Cautious and Out of the Markel |
| 12. Innovation Leads to Euphoria | 12. Negative Front Covers of Newspapers and Magazines |
| 13. Social Proof Leads to Herding | 13. Negative and Depressed Consumer Sentiment |
The Role of ROIC - 2/n
Good quality business
are those kinds of business that can generate higher return on the capital that
is being reinvested but outstanding business are those businesses that can keep
compounding the profit at higher return.
Financial Analysis - A fairytale lore towards analysing different aspects of numbers of the company - Revenue - Part 2/n
It is possible that the method of calculation of revenue could have changed over the years so it is important for us to make sure that the number that has been taken over the years are comparable in nature, some of the following transitions includes:
The Role of ROIC - the Hashim Amla of understanding business characteristics
Return on Invested Capital (ROIC) is a financial metric that evaluates the return a company earns on the funds invested in its operations. It helps assess whether growth adds or diminishes value. Growth creates value when ROIC exceeds the cost of capital (ROIC > COC), but erodes value when ROIC is less than the cost of capital (ROIC < COC).
Topline Growth: The Key to Long-Term Stock Performance
Investors often seek the secret sauce to sustained stock market success, and the data from a BCG Analysis and Morgan Stanley Research study of S&P 500 top-quartile performers (1990–2009) sheds light on this mystery. The chart highlights how sales growth, or topline growth, emerges as the dominant driver of long-term stock performance.
Financial Analysis - A fairytale lore towards analysing different aspects of numbers of the company - Revenue - Part 1/n
Income statement is one of the most important statement of the four types of financial statements of the company and revenue or topline is one of the starting figures of income statement.
Valuable Stock or Value Trap
"Never buy what you don’t want, because it is cheap; it will be dear to you." Thomas Jefferson 1825"
The Undoing Project
In The Undoing Project, Michael Lewis examines the groundbreaking collaboration between Daniel Kahneman and Amos Tversky, focusing on their work in human cognitive biases. Through accessible language, Lewis unravels their influential “Prospect Theory,” which transformed economics.
Atomic Habits
The core lesson from Atomic Habits is to prioritize processes over outcomes to achieve lasting results. By breaking processes into small, manageable tasks, these tasks become habits that drive significant change over time.
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