How I read an annual report in 45 minutes (and what I'm looking for)

Assalamu alaikum,

Last week we talked about the margin of safety — buying below intrinsic value, leaving room for error, waiting for the right price.

A few of you replied with the same question: How do I actually calculate intrinsic value? Where does the information come from?

Good question. The answer is the annual report.

This week I want to walk you through how I read one — and more importantly, what I'm looking for while I do it.

Why Most Investors Skip This

The annual report is long. The language is formal. There are footnotes. There are footnotes about the footnotes.

So most retail investors skip it entirely. They read a summary on a financial news site. They check the app. They look at the graphs.

And they miss the most important information.

The market price of a stock tells you what thousands of other investors currently believe the company is worth. The annual report tells you what the company actually is. These are different things — and the gap between them is where your edge lives.

If you're making investment decisions without reading the annual report, you're driving with someone else's directions.

The Documents Inside an Annual Report

A full annual report contains more than you need. Here's where I spend my time:

The Letter to Shareholders

This is usually written by the CEO and it's the most revealing document in the whole report — not because it contains hard data, but because of how it's written.

Read it looking for:

Specificity vs. vagueness. Good management talks about specific results, specific decisions, and specific learnings. Weak management talks in generalities: "We are positioning ourselves for future growth." That sentence means nothing.

How they handle the bad news. Every business has something that went wrong this year. What do they say about it? Do they acknowledge it directly and explain what they're changing? Or do they bury it in passive-voice language and pivot to optimism? How management communicates difficulty is more revealing than how they communicate success.

What they say about capital allocation. Are they buying back shares? Paying dividends? Making acquisitions? Do these decisions make sense given the company's position and price? A CEO who buys back shares when they're expensive is destroying value. One who buys back shares when they're cheap is compounding it.

I've read annual reports from companies that immediately gave me confidence in the people running the business — and ones that made me want to close the browser and never look again. Voice matters.

The Income Statement

Three numbers I always check first:

Revenue — is it growing? At what rate over 5 years?

Gross margin — what percentage of revenue remains after the direct cost of producing the product or service? This tells you about pricing power and efficiency. A gross margin that's been shrinking for three years is a warning sign even if total revenue is growing.

Net profit — is the company making money? Consistently? Is the profit margin expanding or contracting?

One thing I always verify: cash flow from operations. This is in the cash flow statement, not the income statement, but it tells you whether the profit is real. Companies can engineer accounting profit; cash is harder to fake. If a company reports strong net profit but weak operating cash flow, dig into why.

The Balance Sheet

For halal investors, the balance sheet has double importance — it's both the source of your halal screen financial ratios and your financial health assessment.

For the halal screen:

• Total interest-bearing debt ÷ total assets. Target: below 33%.

• Accounts receivable ÷ total assets. Target: below 45–49%.

• Interest income ÷ total revenue. Target: below 5%.

For financial health assessment:

• Current assets ÷ current liabilities (current ratio). Target: above 1.5.

• Long-term debt ÷ shareholders' equity (debt-to-equity). Target: below 0.5.

These numbers are in the same place. You can run the halal screen and the financial health check simultaneously from one document. I always do this before reading anything else — it's the fastest way to confirm whether continued reading is worth your time.

The Notes to the Financial Statements

This is where the important details live, and where most investors stop paying attention.

The notes explain the numbers in the financial statements. They disclose related-party transactions, litigation, off-balance-sheet items, and accounting policy choices.

One thing I always check in the notes for halal investors: the breakdown of "other income." This is where interest income from cash holdings usually appears. Some companies earn meaningful interest on their cash balances — enough to affect the 5% threshold. You won't find this clearly labelled on the face of the income statement; it's usually buried in a note.

The Management Discussion & Analysis (MD&A)

This is management's explanation of the numbers in plain English. It tells you what happened, why, and what they expect going forward.

I read the MD&A looking for three things:

What's the competitive situation? Are they gaining or losing ground? Are new competitors entering? Is a key customer becoming more important (concentration risk) or less?

What are the risks they disclose? Companies are required to disclose material risks. Most investors skim this section. I read it carefully — not because I expect every risk to materialise, but because understanding what management themselves identify as the key uncertainties helps me calibrate how large a margin of safety I need.

What's management's tone about the future? Confident specifics vs. hedged vagueness. Neither extreme is healthy — overconfidence is a red flag just as much as hand-wringing is. What you want is measured, honest, evidence-based.

A Framework for 45 Minutes

Here's my actual sequence when I open an annual report for the first time:

Minutes 1–5: Balance sheet scan Run the halal screen. Run the financial health ratios. If it fails, close and move on.

Minutes 5–15: Letter to shareholders Read it in full. Take notes on anything that strikes me as specific or revealing — positively or negatively.

Minutes 15–25: Income statement and cash flow Revenue trend over 5 years. Gross margin trend. Net profit trend. Operating cash flow vs. reported profit. Any large deviations or one-off items.

Minutes 25–35: MD&A Competitive landscape section. Risk factors. Forward-looking statements. Management's explanation of any significant changes year-over-year.

Minutes 35–45: Notes Check "other income" for interest income breakdown. Check for any significant off-balance-sheet items, related-party transactions, or unusual disclosures.

At the end of 45 minutes, I know enough to make one of three decisions:

This is worth a deeper look. I'll build a proper valuation model and add it to my watchlist.

This doesn't pass. Either the halal screen failed, the financial health is concerning, or the business fundamentals aren't compelling.

I need more information. Usually this means reading the prior year's report to see how management's stated plans compare to their actual results — a highly revealing exercise.

What Annual Reports Can't Tell You

The annual report is backward-looking. It tells you what happened. It does not tell you what will happen.

This is why the valuation step matters — you're not just assessing what the business has done, but making a judgment about what it's likely to do in the future, discounted to a present value, compared against the current market price.

The annual report gives you the foundation for that judgment. It doesn't make the judgment for you.

That's what investing is: informed judgment, under uncertainty, with a margin of safety built in.

This Week's Action

Pick any company you've been curious about — halal or not, it doesn't matter for this exercise.

Download their most recent annual report (always available free on the company's investor relations page, or on your country's stock exchange website).

Go straight to the letter to shareholders. Read it in full.

Ask yourself: does this person sound like someone who is honest about both success and failure? Specific or vague? Confident or defensive?

You'll be surprised how much a 15-minute read of a CEO's letter tells you about a business.

Hit reply and let me know what you find. I'm genuinely curious what you notice.

Wassalaam,

Rizal Founder, Barakah Profits Former proprietary trader | Ex-KPMG | Ex-Standard Chartered

P.S. If you want the structured framework for evaluating any halal stock — including all the ratios and checks we've covered in the first two editions — the Halal Stock Scorecard is a free download at barakahprofits.com/scorecard. It's the one-page summary of everything.