The Motley Fool

Annual Reports: Useful or Useless?

Deciding which companies to buy and sell is never an easy task. Ultimately, no investor knows exactly how the future will turn out. However, by analysing a company in some detail from a variety of perspectives, it can be possible to make an informed judgment on its future investment potential.

One place many investors turn to when analysing a company is its annual report. This is released by all listed companies and includes details such as financial statements, progress made during the year on various areas of the business, as well as its strategy for the future. Since it is released by the company, it could be argued that it puts a positive spin on its overall performance and outlook. But does this make it useless? Or, could an annual report still be useful for Foolish investors?

Facts and figures

Of course, an annual report contains a wide range of facts and figures which can prove invaluable to an investor. For example, it includes an income statement, cash flow statement and balance sheet – all of which are primary sources. They can therefore be trusted to be accurate and used in order to gauge the financial strength and performance of a business. Although such facts and figures are available elsewhere on the internet for example, there is always a danger that they are incomplete or inaccurate when not obtained from a primary source.

Furthermore, a company’s annual report contains a range of facts and figures which an investor may not be able to find elsewhere. They will contain notes to the accounts, which provides details on how the financial statements have been generated. Notes can provide clues as to how a company is performing beneath face value, and provide guidance on its future outlook. Other metrics included in an annual report may form part of a company’s KPIs, and understanding the focus of a business (and its past success in meeting KPIs) can have a direct effect on its investment outlook.

Company content

An annual report also contains a variety of content written by the company itself. While this will almost inevitably include a positive spin, it can be a useful means of finding out from management itself how the business is performing, and what its future strategy is set to be.

This can be useful to investors, since they may then be able to determine whether a company’s outlook fits in with their own investment themes. For example, an investor may be bullish on emerging markets, while a company may be focused on the developed world. In such a situation, the company may therefore not be a sound investment for that particular investor.

Takeaway

Of course, the big attraction of annual reports is their availability. Anyone with an internet connection can download them for free. Alongside their wide range of facts and figures, as well as comment from the company on its performance and strategy, this makes them a useful tool for investors. Certainly, they may contain a positive spin on the company in question. But provided investors maintain a critical attitude when reading them, they are worthwhile in order to make investment-related decisions.

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