What should I look for when I read an annual report?

The topic for this article is the answer to the following question: what should I look for when I read an annual report? As a responsible shareholder in a company, and a responsible and proactive investor, you need to know what an annual report is, and how exactly you should read an annual report.

To begin with, let us start by talking about what exactly gives a particularly company's stock value. The value of a stock is directly linked to, is actually a product of, the ability of a company to produce a good cash flow from the capital that the company invests. If a company is believed to be successful at this creation of cash profits and cash flow, and is predicted to be good at producing cash flow in the future, then its stock value is higher and hopefully will continue to rise. The annual report of a company is intended to give a company's shareholders a good picture-overall and in detail-of the financial well-being of a company and how good it is at achieving those financial goals and cash flow potential. If you can read an annual report, then you can understand how well your company is doing and how well your company will be doing in the future. But who can really read an annual report? There's no sort of explanation or map key that goes along with the annual report. Instead, you have to know ahead of time how to read and how to understand an annual report so that you can really get it to work for you.

This annual report is delivered to the shareholders and the annual general assembly. Since the majority of shareholders don't go to the annual general meeting of the company, the financial reports are sent out. There are three major parts of a company's annual report. We will shortly discuss these three parts, in no particular order. First of all, you have the income statement of the company. Basically, the income statement of the company can let you know how good the company is at doing what it's meant to do: how good it is at making money. The second part of an annual report is a balance sheet. This balance sheet will tell you how much the company owns, what the company owns, how much the company owes, and how much the company owes. Third, you have the cash flow statement of the company. This cash flow statement is what tells you precisely how the company pays for all of its operations and how it plans to pay for future growth and expansion.

Those are the three basic parts of an annual report. But an annual report is usually broken down into a number of sections. Some annual reports have less of these sections, some have more, depending on the kind of industry the company is involved in (a pharmaceutical company will probably have a few different sections than a company involved in heavy industry manufacturing). So here are the nine basic sections of an annual report.

Letter from the Chairman of the Board

This letter might seem like it's mostly full of broad statements to make investors feel better. However, the chairman of the board letter probably will include important information that will help you know what conditions are changing, goals that have been achieved over the past year, goals that have not been achieved in the past few years, actions that will not be taken. Compare this with previous annual reports. Look to see what is being done, and whether or not the company is able to achieve it goals, or if it has great vision but no ability to achieve it.

Information about Marketing and Sales

This section will tell you what the company is selling, who they're selling to, where they're selling it. Make sure that you can clearly understand where the company is making its money and if you can understand the operations of the company.

10 Year Summary of Financial Figures

Carefully review this section so that you can see the trend of the company and whether or not it is growing well.

• Management Discussion and Analysis
• CPA Opinion Letter
• Financial Statements
• Subsidiaries, Brands and Addresses
• List of Directors and Officers
• Stock Price History

The real key to reading an annual report is to carefully examine trends within the company, the ability of the company to achieve goals. Make sure that you note whether or not the company's annual report is well written, or whether or not you feel that the company is trying to hide things.