One of the most valuable tools for an investor trying to determine if a particular company is worth the risk that they are taking is the annual report published by the company each year. Corporations painstakingly prepare and polish the report before it is published, but despite the pretty pictures, the substance is going to tell the truth about the viability of the company as an investment.
To know where to begin to analyze the company, investor must know the basic sections of the annual report and what is contained therein. There are nine basic sections of an annual report. Each company’s report may be laid out differently, but the crucial information will be there.
All annual reports will have a letter from the chairman, where he or she will outline the company’s performance for the year, analyze any missteps that may have occurred, and briefly describe the direction that the board of directors is taking the firm. While the letter will generally paint the company in a good light, it is also a place to find out about any problems the company may have recently experienced. This is also a good time to mention the management discussion and analysis portion of an annual report, where current management takes the time to outline financial trends that have been or will be affecting the company. There will also be a part of the report that will name the directors and officers who are intimately involved in management analysis and high-level company management.
Look for a sales and marketing piece in the annual report. This piece generally outlines the services and/or goods that the company offers. It will also list their most important products, which can be key to determine if a company is keeping up or falling behind.
If a company is at least ten years old, the annual report will contain a ten-year financial summary. As the name implies, this section reviews the company’s performance over the last decade, and can show trends in good or bad management, as well as reveal struggling or successful product lines.
The letter of CPA opinion contains a certification from a third party Certified Public Accountant that the information contained in the report is accurate, and whether the CPA has any issues with the information given. Conditional statements in the letter of CPA opinion reflect poorly on the reliability of the report.
Financial statements are where an investor would expect to find the nuts and bolts of any performance measures. The financial statements should include information such as debt, equity, assets, cash, cash-flows, etc.
There should also be a section in the annual reports that lists any subsidiaries, brands, or addresses (if applicable). Specific information, such as store locations or product line names should be found in this section.
Lastly, the investor should also find a section containing the company’s stock ticker and stock price history. This section should include the ticker symbol for any exchange on which it is listed, and which exchanges those are.
Any perspective investor should read a company’s annual report closely before making a decision to buy or sell a certain stock. However, focusing on specific parts of the annual report will make a buying or selling decision easier for the investor. Perspective investors should carefully review the financial statements and look for any footnotes made on the statement. It is important not to overlook the footnotes in a financial statement, as they may contain critical decision-making information. In conjunction with reviewing the financial statements, the investors should also read the CPA letter of opinion to ensure that the CPA agrees that the information found in the statements is reliable.
Another good location in the annual report to look for key information is in the opinion of management and the sales team. Review the letter from the chairman, management analysis, and sales pieces for potentially phenomenal or potentially disastrous opportunities.
Reviewing an annual report can be a daunting task if an investor does not understand how to digest the information, and where to begin breaking down information provided. A thorough inspection of the above mentioned sections of the annual report should help the investor make decisions with confidence, whether that is spotting an opportunity or avoiding a disaster.