The MBA's Guide to Reading Annual Reports

Corporate annual reports provide investors with a wealth of information, combining a company's yearly financial performance along with the company's commentary on both past and present performance. Before investing in a company, you should obtain a copy of the company's annual report and read it thoroughly in order to get a better feel on the company and its current situation. You may be surprised to know that anyone can request a company's annual report - current investors will receive one automatically and anyone else can request an annual report from the Investor Relations (IR) section of the company's website. Although you can typically view the company's annual report online, it's a good idea to look at it in person to see the annual report's production quality. Although this may seem insignificant, the annual report's quality (both in its graphics and its content) will give you a good idea of the image that the company is looking to project. You'll be surprised to see glossy, full color annual reports from company's that have never made any profits and non-impressive looking annual reports from company's that consistently exceed profit expectations.

Beyond the appearance of the annual report, you'll notice that some portions of company's annual reports are very similar in format. This is because companies typically include their federally regulated Form 10-K as part of their annual report, which mandates that a company include its balance sheets and statements of cash flow (which include the company's income statement) as part of this disclosure. The company must also give an overview of its business and corporate strategy, as well as information about what potential risks the company sees for investors. You'll want to read through all of this information very carefully and may want to consider completing further research on the company's main competitors and risk factors to determine if you agree with the company's outlook on the situation.

It is also interesting to read the CEO's letter to the shareholders. Although this and the other company-generated information may seem to be propaganda, it is a good way to see how the company views itself. The company will often provide a mission statement or key goals/values in the annual report, which can be compared against the actual financial results to determine whether the company is actually meeting its goals.

If you've never looked at an annual report before, you may be overwhelmed by the amount of information provided. However, once you get used to the format and terminology which is used by most corporations, you will find that the annual report is a necessary tool in determining a company's current and projected performance.