How to Read Annual Reports

Company's Annual Reports
Is The Best Way to Know Their Financial Health
Annual reports is the formal document that listed companies published annually. Its main purpose is for the company to inform its shareholders and potential investors how the company performed over the past one year.

Previously these documents are available to the shareholders by mail, but the Internet has made them more accessible than before.

The respective company’s website also allows anyone to download the free copy of their annual report. For potential investors, the annual report provides important information that can be used to assess if it is worthwhile investing in the company.

The information provided in the prospectus allows us to assess the profitability, survivability, growth, stability, dividends, potential problems, risks and other factors which may affect pour investment in that company. This can be analyzed from key financial ratio as well as macro and micro-economic risk analysis.

Company’s annual report comes in different forms and sizes. Most of them are printed on fancy paper with several pages of photographs. This is because they are often used as a public relation tool to enhance the image of the company.

Most importantly, it tells you what the company considers important, what it is doing and what it is planning to do.

The law requires that the company give a true and fact view of its affairs in annual report. It must not leave out any important information that could help investors’ decision-making. It is up to the individual investor to pick up and act on such information. However, most people just flip through the pages, skip the account and throw away.

Why do people often do that? It is not easy to read annual reports actually. The financial statements use too much jargons. And, it is easy to suffer from overloaded information too. In fact, you need to know how to read between the lines.

While there are accounting standards to guide the presentation of financial statements, it takes experience and knowledge to sieve through the information and extract only what really matters. So don’t be afraid. Just get started. You’ll gradually understand what the company is trying to say after reading them from time to time.

To be frank, you do not have to read the report cover to cover. The first few pages are colorful and present a nontechnical overview of the company’s objective and how well it is meeting them.

The front section will probably also tell you about the company’s strategies, products and competitive positioning. The chairman’s statement or message to shareholders may be included here.

The back portion of the annual report is usually filled with financial information about the company. The real meat of an annual report is in the financial statements and notes found in this portion. In fact, I believe it is a good idea to read annual reports from back to front. The board of directors or the equivalent governing body is responsible for the preparation of the company’s financial statements.

You can learn a lot by reading about how the company changed its business model or carried out its desired plans from one year to the next. Look over these financial data with a critical eye.

Problems such as declining revenues or cash flow may not be mentioned in the chairman’s statement, but they cannot be hidden in financial statements.

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Annual Reports 101
Straightforward guide to reading the primary financial documents that make up the annual report, and then extracting more information

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