Tips for Reading an Annual Report

How you read an annual report depends upon your purpose. As an Investor, your purpose may be to assess: profitability, survivability, growth, stability, dividends (if any), learn of problems, risks and other factors which may affect your investment in that company. Reviewing a company yearly is the minimum diligence required. The Annual Report provides a convenient way to do this. If you own shares in a company you should receive a copy in the mail.

Annual Reports are a corporate "work of art" and are not read like a normal book. There is no single authorship. No plot. No requirement to read cover to cover. No beginning, no end. Putting annuals together year to year creates a kind of "never ending story" as the entity progresses along, merges, closes or is acquired.

There are nine identifiable sections in most Annual Reports. Not all reports will have all the sections or the same type and level of information. Here are the sections and what to look for in each:

  1. Chairman of the Board Letter
    Should cover changing conditions, goals to achieve or achieved or missed, actions taken or not to be taken. Is it well written? Reading between the lines - what is being apologized for?
  2. Sales and Marketing
    Should cover what the company sells, how, where and when. Is it clear where the company makes most of its money presently? Is it understandable? Is the scope of lines, divisions and operations clear?
  3. 10 Year Summary of Financial Figures
    Is this included? What's the growth of profits and operating income?
  4. Management Discussion and Analysis
    Is there a clear discussion of significant financial trends over past two years? How candid and accurate is it?
  5. CPA Opinion Letter
    Written by the CPA firm as an opinion on the company's financials. The important thing to look for here is what the qualifications are.
  6. Financial Statements
    Check sales, profits, R&D spending, inventory and debt levels over time. Read the footnotes to ferret out other information.
  7. Subsidiaries, Brands and Addresses
    Where is the headquarters? Is it clear what lines, brandnames the company has and what the overseas distribution network is?
  8. List of Directors and Officers
    How many outside vs. inside directors? Are the directors well known and respected? Are there less than 5 or more than 12 directors?
  9. Stock Price History
    General trend of price over time: up or down? Which exchange is company traded/listed? Stock symbol? Bonus/dividend history?
Some things to consider about the report in general...
  • Is the report well written, clear, concise and succinct?
  • Are photos modeled or live? How well do they relate to the text of the report?
  • How much discussion is there of competition? How clear are product plans?
  • Could the report be made more interesting, understandable or eye-appealing?
  • How does it compare with others in same industry?

    Be careful, not all Annual Reports are what they appear.

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