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:
Some things to consider about the report in general...
- 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?
- 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?
- 10 Year Summary of Financial Figures
Is this included? What's the growth of profits and operating income?
- Management Discussion and Analysis
Is there a clear discussion of significant
financial trends over past two years? How
candid and accurate is it?
- 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.
- Financial Statements
Check sales, profits, R&D spending, inventory and debt levels over time. Read the footnotes to ferret out other information.
- Subsidiaries, Brands and Addresses
Where is the headquarters? Is it clear what
lines, brandnames the company has and what
the overseas distribution network is?
- 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?
- Stock Price History
General trend of price over time: up or down? Which exchange is company traded/listed? Stock symbol? Bonus/dividend history?