DRHP LensAn annual report is written to reassure. The warning signs are rarely in the chairman’s letter; they sit in the notes, the auditor’s report and the cash flow statement. These are the ten places a CFO looks first.
- The auditor’s report. Read the opinion paragraph, any qualification, any emphasis of matter and the key audit matters. Then read the CARO annexure, which covers loans to related parties, statutory dues and fraud reporting.
- A change of auditor. A mid-term resignation, and the reasons given in the stock exchange filing, deserve attention.
- Operating cash flow against net profit. Over three to five years, these should broadly track each other. A persistent gap is the most reliable early warning.
- Receivables and inventory days. Rising days of sales outstanding or inventory, while revenue grows, can mean aggressive revenue recognition or unsold stock.
- Related party transactions. Check the related party note for large sales, purchases, loans, guarantees and royalties with promoter entities.
- Contingent liabilities. Compare tax demands, guarantees and claims with net worth. Large and rising contingent liabilities can become real liabilities.
- Capitalised expenses and intangible assets. Expenses moved to the balance sheet, such as development costs, flatter current profit.
- Other income. Profit that depends on treasury income, one-off gains or write-backs is not operating strength.
- Promoter pledges and shareholding changes. Check the shareholding pattern and disclosures for pledges and steady promoter selling.
- Leases and Ind AS 116. Lease liabilities sit on the balance sheet under Ind AS 116. For rent-heavy businesses, compare EBITDA with and without the lease adjustment to see the true cash cost of rent.
How DRHP Lens helps
DRHP Lens reads annual reports as well as offer documents. It flags these signals and cites each one to a page, so you can go straight to the note that matters.
Run the red-flag scan
Upload a DRHP, RHP, NCD prospectus, AIF PPM or annual report. The scan runs in your browser, nothing is uploaded, and every finding is cited to a page.
Analyse a documentFrequently asked questions
What are red flags in an annual report?
Common red flags include auditor qualifications or resignations, operating cash flow well below net profit, receivables rising faster than sales, large related party transactions, rising contingent liabilities and promoter share pledges.
What is CARO in an annual report?
CARO is the Companies (Auditor’s Report) Order, which requires auditors to report on specific matters such as loans to related parties, unpaid statutory dues and fraud.
Why does cash flow matter more than profit?
Profit includes estimates and non-cash items. Operating cash flow shows whether the business actually collected cash, which is harder to manage.
This guide is general education about how Indian offer documents are structured. It is not investment advice or a recommendation to subscribe to any issue. Regulations change; always read the current offer document and the SEBI regulations it refers to, and consult a SEBI-registered investment adviser before you invest.