Intelligent investing requires analyzing a vast amount of information about a company to determine its financial health. Armed with this information, an investor can better understand how much risk might be involved with backing a company based on how well it’s performed historically, in recent quarters, and toward its financial targets.
Exactly where this information comes from depends on the specific company that’s being invested in, but typically requires several financial statements, including a balance sheet, cash flow statement, and income statement.
In addition to these documents, most investors look forward to reviewing a company’s annual report—a collection of financial information and analysis that can prove invaluable in evaluating the health of a company.
If you’re not an investor, but an employee working within a corporation, the annual report can impart valuable information pertinent to your career. Understanding how your company is performing and the impact your actions have had on its business objectives can help you advocate for a promotion or other form of career advancement.
If you’re unfamiliar with what goes into an annual report, there’s some good news: You don’t need to be a financial expert to get value out of the document or understand the messaging in it.
Here’s an overview of the different information you’ll find in an annual report and how you can put it to use.
What Is an Annual Report?
An annual report is a publication that a public corporation is required by law to publish annually. It describes the company’s operations and financial conditions so that current and potential shareholders can make informed decisions about investing in it.
The annual report is often split into two sections, or halves.
The first section typically includes a narrative of the company’s performance over the previous year, as well as forward-looking statements: Letters to shareholders from the chief executive officer, chief financial officer, and other key figures, as well as graphics, photos, and charts.
The second section strips the narrative out of the picture and presents a variety of financial documents and statements.
Unlike other pieces of financial data—and because they include editorial and storytelling—annual reports are typically professionally designed and used as marketing collateral. Annual reports are sent to shareholders every year before an annual shareholder meeting and election of the board of directors, and often accessible to the public via the company’s website.
Annual Report vs. 10-K Report
Annual reports aren’t the only documents public companies are required to publish yearly. The US Securities and Exchange Commission (SEC) requires public firms also to produce a 10-K report, which informs investors of a business’s financial status before they buy or sell shares.
While there’s similar data in both an annual and 10-K report, the two documents are separate.
10-K reports are organized per SEC guidelines and include full descriptions of a company’s fiscal activity, corporate agreements, risks, opportunities, current operations, executive compensation, and market activity. You can also find detailed discussions of operations for the year, as well as a full analysis of the industry and marketplace.
Because of this, 10-K reports are longer and denser than annual reports, and have strict filing requirements—they must be filed with the SEC between 60 to 90 days after the end of a company’s fiscal year.
If you need to review a 10-K report, you can find it on the SEC website.
What Information Is Contained In An Annual Report?
An annual report typically consists of:
- Letters to shareholders: These documents provide a broad overview of the company’s activities and performance over the course of the year, as well as a reflection on its general business environment. An annual report usually includes a shareholder letter from the CEO or president, and may also contain letters from other key figures, such as the CFO.
- Management’s discussion and analysis (MD&A): This is a detailed analysis of the company’s performance, as conducted by its executives.
- Audited financial statements: These are financial documents that detail the company’s financial performance. Commonly included statements include balance sheets, cash flow statements, income statements, and equity statements.
- A summary of financial data: This refers to any notes or discussions that are pertinent to the financial statements listed above.
- Auditor’s report: This report describes whether the company has complied with generally accepted accounting principles (GAAP) in preparing its financial statements.
- Accounting policies: This is an overview of the policies the company’s leadership team relied upon in preparing the annual report and financial statements.
What to Look for in an Annual Report
While all the information found in an annual report can be useful to potential investors, the financial statements are particularly valuable, as they provide data that isn’t obscured by any sort of narrative or opinion. Three of the most important financial statements you should evaluate are the balance sheet, cash flow statement, and income statement.
The balance sheet shows a company’s assets, liabilities, and owners’ equity accounts as of a specific date, illustrating its financial position and health.
The income statement shows a company’s revenue and expense accounts for a set period, allowing you to gauge its financial performance. Using trial balances from any two points in time, a business can create an income statement that tells the financial story of the activities for that period.
Cash flow statements provide a detailed picture of what happened to a business’s cash during an accounting period. A cash flow statement shows the different areas in which a company used or received cash, and reconciles the beginning and ending cash balances. Cash flows are important for valuing a business and managing liquidity, and essential to understanding where actual cash is being generated and used. The statement of cash flows gives more detail about the sources of cash inflows and the uses of cash outflows.
These three documents can help you understand the financial health and status of a company, and they’re all included in the annual report. When you read the annual report—including the editorial information—you can gain a better understanding of the business as a whole.
An annual report can help you learn more details about what type of company you work for and how it operates, including:
- Whether it’s able to pay debts as they come due
- Its profits and/or losses year over year
- If and how it’s grown over time
- What it requires to maintain or expand its business
- Operational expenses compared to generated revenues
All of these insights can help you excel in your role, be privy to conversations surrounding the future of the company, and develop into an effective leader.
Critical Information for Investors and Employees Alike
Being able to analyze annual reports can help you gain a clearer picture of where a company sits within its industry and the broader economy, illuminating opportunities and threats.
The best part about learning to read and understand financial information is that you don’t need to be a certified accountant to do so. Start by analyzing financial documents over a set period. Then, when the annual and 10-K reports are published, you can review and understand what leadership is saying about the operational and financial health of your company.
If you’re an investor, knowing how to read an annual report can give you more information from which to base your decision on whether to invest in a company. If you’re an employee within an organization, learning how to read and apply the information contained in an annual report can help you understand your company’s goals and capabilities and, ultimately, further your career.
Do you want to take your career to the next level? Download our free Guide to Advancing Your Career with Essential Business Skills to learn how enhancing your business knowledge can help you make an impact on your organization and be competitive in the job market. Or, consider enrolling in the Financial Accounting online course, which can teach you the key financial topics you need to understand business performance and potential.
