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MANAGEMENT DISCUSSION and ANALYSIS (MDA)
In MDA, a company’s management explains significant changes from year toyear in the financial statements. Although presented in a narrative format, the MDA mayalso include charts and graphs highlighting the year-to-year changes. Managementgives its analysis on the past performance and future outlook for the company.For example, Grasim Industries had given a detailed examination of thecompany’s past performance and future outlook in its 2005-06 Annual Report. Thecompany, in its Annual Report, revealed that their Cement business had been the keydriver of revenues and earnings, whereas, the VSF and sponge iron business had notdone well during the reporting period. The company is ramping up its capacity by 95 lakhtones per annum (TPA). The company had identified the following risks that wereaffecting the company: Economic risk (through margin pressure), foreign exchange risk,interest rate risk and commodity price risk. The discussion also outlined the steps beingtaken by the company to mitigate these risks.In the ‘Management Discussion and Analysis’ section of its 105
Annual Report,the Management of Indian Hotels outlines an overview of Global Tourism Industry,Indian Economy & the Tourism Industry, the company’s sources of CompetitiveAdvantage, opportunities and threats faced by the company and an Update on KeyInitiatives taken by the company to make the best use of the current buoyancy in HotelsIndustry. The analysis lists out major risks and concerns for the company and the riskmitigation initiatives taken by the company. With the help of such open discussion aboutthe company’s outlook, scrutiny of a company’s fundamentals and valuation becomesmuch easier.At the end of Management Discussion and Analysis section, companies usuallygive a cautionary statement stating that the statements given may be ‘forward-lookingstatements’ and actual results could differ from those expressed in an annual report.
PROFIT AND LOSS ACCOUNT
It is a very important document in an annual report. And it certainly has the mostimmediate impact on a stock price. The profit and loss account gives vital information onthe operations, profitability and growth of the company. It summarizes the financialyear’s operations of a business in the bottom line, which after accounting for everyexpense could be either a profit or a loss. The important components are given below.
:The first item in a P&L account is sales revenue. It indicates whether ornot the company is growing. If revenues are growing rapidly, it is a clear signal that thecompany is doing well. However, this has to be seen in the light of profitability andefficiency of operations also.
:It is so called because it does not arise out of the main business of thecompany; it includes profit on sale of asset, insurance claims, dividends received fromsubsidiaries, and income that cannot be included in sales revenue.
:Cost of production and other expenses are detailed here.