How to Read an Annual Report

How to read an annual reportAn annual report is a detailed breakdown of a public companies performance over the last 12 months.  (If you are looking for more info about what is an annual report.) Experienced and amateur investors alike will use the information contained in these reports to make investment decisions.

However, at first glance, an annual report can look like a complicated and confusing document to analyze.  Fortunately for all investors, these reports have become standardized over the years to contain the same basic key parts.  We hope that this simple breakdown of these elements will help turn you from investing like Jimmy Buffer into the next Warren Buffet.

Some Key Elements of an Annual Report

  1. Description of the Business – this section may or may not contain a letter from the CEO or Chairman of the Board. This letter will go into brief detail regarding the successes or failures of the company from the previous year.  It will also describe what the company plans to do in the upcoming year including new products, opportunities and overall general insights about the growth of the company moving forward
  1. Financial Information and Notes to Financials – this is the most important section of the report. This will describe, in great detail, the profits and/or losses of the company from the previous 12 months.  This section will compare growth or decline year-over-year and explain exactly what factors caused these changes.  It will also summarize important data from the balance sheet, income statement and cash flow statements, just to name a few. (Please note – Financial Information and Notes to financials should be read in conjunction with the Management Discussion and Analysis.)
  1. List of Directors and Officers – this is a simple description of the key players in the company and what their roles, it may also include their backgrounds and/or past business experience.
  1. Sales and Marketing – this section will go into detail regarding any current products or services that the company provides. It will also describe any new offerings that the company is planning on releasing in the coming months. Typically this section is where the company gets to boast about how successful they will be and why you should invest, or consider investing.
  1. Management Discussion and Analysis – similar to the Financial Results, this section will typically show a side-by-side comparison of financial results from one year to the next. (Ex. Sales in 2013 compared to Sales in 2014). This section makes it much easier to see an overall snapshot of how successful, or unsuccessful, the company has been over the previous year.  Very little actual text will be included in the section, just the facts Jack!