Annual Reports

The Annual Report to Shareholders is the principal document used by most major public companies to communicate directly with shareholders. They contain discussions of the previous year's activities, plans for the coming year, and financial data. Since it is not a required official Securities and Exchange Commission filing, companies have considerable discretion in determining what type of information this report will contain and how it is presented. Annual Reports generally contain many photos, interesting graphics, and considerable narrative, in addition to the financial statement about the company.

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), to learn of problems, risks and other factors which may affect your investment in that company. The Annual Report provides a convenient way to do this. If you own shares in a company you should receive a copy of the annual report in the mail. However, many companies now post their annual report on the company web site.

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. Putting annual reports together year to year creates a kind of "never ending story" as the corporation progresses, merges, closes or is acquired.

When used properly, an Annual Report can be an excellent source of worthwhile information. The Annual Report tells what the company is doing, what it plans to do, how it is organized, what products or services it has, and in what foreign activities it is engaged. It can shed light on management's philosophy, as well as its justification for the company's behavior. The photographs can provide a vivid glimpse of products and properties of the firm. At the very least, the Annual Report suggests how the company views itself and how it presents itself to the public.

Most annual reports follow similar formats and usually contain the same sections. It's not important whether the company calls the first section a shareholder letter or a chairman of the board letter, but it does matter if the report doesn't contain information about challenges the company faces and how it plans to meet them.

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

  1. Chairman of the Board Letter
  2. Sales and Marketing
  3. 20 Year Summary of Financial Figures
  4. Management Discussion and Analysis
  5. CPA Opinion Letter
  6. Financial Statements
  7. Subsidiaries, Brands and Addresses
  8. List of Directors and Officers
  9. Stock Price History
Mission Statement

The company's annual report is a good place to find the mission statement. A company's mission statement is a broadly defined statement of purpose. It typically states the organization's basic product or service, the primary market, long-term goals and organizational philosophy.

Letter to Shareholders.

The letter to shareholders commonly begins with a statement such as "I am pleased to report" and is signed by the president alone or with the chairman of the board. This letter gives the readers a sense of the mood of the company -- whether aggressive or defensive, proud or pessimistic, expanding or retrenching. The letter, written by the chairman or chairwoman of the company, is one of the most important parts of the annual report.This section gets the most attention from upper management and is intended to tell the shareholders how the company fared that year. While it usually sounds upbeat and optimistic about the future, it also holds the key to how the company is really doing.

Sales and Marketing.

This is the section with lots of pictures and colorful graphs describing the company and its activities. It usually consumes the largest part of the annual report and is designed to impress the reader. The goals of sales and marketing should be easy to discern. Look for whether the description of product lines and the scope of each division are clear.

A clue to potential risk is how many divisions the company has. If the company makes or sells only one product, risk may increase if the need for this product ever subsides. With many products, a company may have its bases covered so problems can hurt only one division at a time,which presents less risk to shareholders investment. This is also the section where management tries to convince shareholders of the company's worth, so look for ways in which the company plans to turn strategies and operating goals into financial results.

Financial Review.

Usually written by the company's Chief Financial Officer, the financial review is an analysis and interpretation of the financial data. It also includes a discussion of the balance sheets for the last two years and of the income statements for the past three years. The CFO should cover in detail the company's plans for the future and an explanation of its past — this gives the reader a basis to compare the current figures with the company's previous returns. You should also be asking yourself whether there is a discussion of trends, pricing, volume, and previous influences — the good, the bad and whether they will be repeated.

Financial statements.

Now you get into the numbers. The balance sheet will tell you how rich the company is. Start by examining the assets, the liabilities and the stockholder's equity. This number indicates what would be left if the company should sell and pay off everything today. This number should grow from year to year.

By dividing the long-term liabilities by the stockholders' equity, you'll end up with the debt-to-equity ratio. This number refers to how much of a cushion the company has for creditors if liquidation becomes necessary. If the ratio is high, the company borrows a lot of money for growth. If sales are growing and if the company has enough money to make the payments, which you can find in the statement of cash flows, a high ratio is okay.

The statement of income is the company's revenue minus expenses. The result is how much the company made, or lost, over the year. At the bottom of the statement is the Earnings Per Share, which indicates how much a single share earned or lost. It is this number that influences the stock market and how the company's shares will act in the market. This number can be tricky. It may reflect company changes, like selling one of the company's plants or cutting the budget for a certain division. Check the footnotes to find out.

Also in the statement of income are the net sales. Check if sales are increasing at a faster rate than last year and if they've risen faster than inflation. If sales are slower, it may mean that sales are behind. Sales may also be behind if the company did some expansion that in the long run could mean high profits. Again, the answers are usually in the footnotes.

Auditor's Report.

Federal securities laws require publicly owned companies to follow a set of rules and financial reporting guidelines. Associations — such as the Financial Accounting Standards Board (FASB), a private organization of accounting professionals, and the Securities and Exchange Commission (SEC), a U.S. government agency — develop the rules and guidelines. These generally accepted accounting principles (GAAP) help ensure that the financial information reported is reliable and consistent in form with the reports all other companies prepare. GAAP also helps safeguard against investor fraud. The report by a certified public accountant will let you know if the company's report is in line with the generally accepted accounting principles. Phrases that use the words "subject to" are warnings that numbers could change depending on the outcome of company initiatives.

Footnotes.

The footnotes reveal a story that may not be present in the rest of the report, such as changes in management and division budgets. The first footnote is usually called the summary of significant Accounting Policies. It explains which accounting methods were chosen and for what reasons. Look for practices that may inflate revenues or minimize expense. The remaining notes follow the order of the financial statement, with a few other notes providing extra information about the company — such as subsequent events, sales and major liabilities

Things to look for in an Annual Report:

Annual Report

A page or more of an annual report will be devoted to listing the management team of the company and the Board of Directors. Reviewing this list will give a sense of the background and diversity of the management team. The number of directors and the position of the directors in their respective companies can give a sense of the quality of leadership of the company.

Many companies that provide copies of their annual reports online provide a link from the company homepage. If you do not see a link to "Annual Report" or "Financial Information" look for a link named "Investors Services" or "Investor Relations."

There are a multitude of web sites that provide access to annual reports. Some of the more useful and free are listed. If you are looking for the most recent annual report for one company only, you might simply search for the company's web site. Most companies post their most recent annual report on their web site, as well as several years of past annual reports

 

Web Resources

Annual Reports
Provider of online annual reports to individual and institutional investors. Allows users to review an annual report in an easy and convenient manner. Boasting the most complete and up-to-date listings of annual reports on the Internet, AnnualReports.com provides instant access to annual reports in their actual format in one single location.
Company Annual Reports On-Line
CAROL is an on-line service offering direct links to the financial pages of listed companies in Europe and the USA. CAROL provides direct access to companies' balance sheets, profit and loss statements, financial highlights etc. Access is free of charge, but you will be asked to register for access to annual reports. Do so by clicking on the 'Registration' link in the main menu.
Investor Relations Information Network
The Investor Relations Information Network (IRIN) provides a single point of reference for accessing electronic annual reports — considered by many investors to be the most valuable means of communication between a company and its shareholders. More than 12,500 current and historical annual reports are available for viewing and printing. And if you want to request a hard copy of an annual report, IRIN will forward your request to the appropriate company.
Public Register's Annual Report Service
A browsable collection of links to over 2292 reports. Links to corporate homepages are also provided. In addition, you can order print versions of annual reports for free.