An annual report is a public document that reveals to shareholders the financial health, achievements, failures, and prospects of a company. Alongside other financial documents, not to mention valuation metrics, an annual report can help investors decide whether they should invest in a company’s stock.
Where do you find an annual report and how can you read one? We’ll break it down below.
What is an annual report?
An annual report is a yearly report that’s issued directly to shareholders, detailing a company’s performance and expectations for the next year. Unlike other financial documents, which can be dry and boring, annual reports are often filled with impressive graphics, easy-to-read charts, and engaging stories.
Often, when you find a good one, you’ll feel like you’re at the company’s end-of-the-year Christmas party, listening to executives as they reflect (emotionally) on the performance of the company.
What does an annual report include?
A typical annual report will include the following:
- A letter from the CEO
- A broad description of industry changes and trends
- Updates on research, development, and new product releases
- Reflection on the company’s past successes, as well as detailed reasons for certain failures
- Management’s discussion and analysis (MD&A) of the company’s finances and performance over the year
- Financial statements (balance sheet, income statement, and cash flow statement)
- Information on the company’s stocks and dividends
It’s important to note that companies must provide annual reports to shareholders, though they’re not required to disclose every detail within the report. In addition to stocks, mutual fund managers must also distribute annual reports to the shareholders.
How should you read an annual report?
The first place to start is with the CEO’s letter to shareholders. In this letter, CEOs will typically talk about the successes of the companies, how they hit milestones or overcame challenges. Additionally, they may talk about the competition they’re facing, or explain why numbers in the financial sections are lower than expected.
Once you’ve read the CEO’s letter carefully, move on to the Management’s Discussion and Analysis (MD&A). Here you’ll find an overview of the company’s financial performance. The balance sheet here will tell you if a company has gotten stronger (or weaker) over the last year.
Cash flow statements, on the other hand, will tell you how much cash the company has generated (or used). You should also read any commentary from management carefully, especially if the numbers are lower than in previous years.
Once you’ve studied the company’s finances, move on to the Risk Factors section. In this section, you can see if a company is facing any legal proceedings. This is extremely important to investors, as litigation can cost companies billions of dollars.
Where can you find a company’s annual report?
Most companies will publish their annual reports on an investor relations’ webpage. If you don’t want to go searching all over your company’s websites, you could always type “investor relations” along with the company’s name in your favourite web browser.
Alternatively, you could find your company’s annual report on SEDAR’s website, where all companies must publish them.
Can you trust an annual report?
Yes, for the most part, you can trust annual reports. Companies rarely fudge numbers in their financial disclosures, and you can gather an accurate understanding of what a company has accomplished within the year, as well as where the company wants to go in the next.
Keep in mind, however, that companies often use annual reports as marketing tactics to build momentum around their brand. Though the information is usually accurate, the way it’s presented may be skewed or biased.
Thus, to truly read an annual report, you should employ a fair amount of critical thinking, as what you read isn’t always the full story. The more annual reports you read, the easier it will be to read between the lines.
Foolish bottom line on annual reports
As a savvy investor, your number one objective should be to discover everything about a company, including its financial health and future objectives, before you buy its shares. The annual report is a great place to start, as it breaks down a company’s products and services and gives commentary on its performance, upcoming challenges, and even risk factors that investors should know about.