Reasons to Read an Annual Report Before Investing in Stocks

Read an Annual Report

If you read an annual report of an interested stock, it will be one of the most thorough analysis of a company you will find. Most annual reports are filled with beautiful pictures and testimonies from satisfied customers, but this does not deter from the real purpose of the report, which is to give an objective and thorough overview of the company. The annual report is a valuable and necessary analysis tool for both current and potential investors interested in measuring value and risk of a company. The Securities and Exchange Commission (SEC) requires companies to send investors an annual report every year.

What do annual stock reports include?

• A five-year comparison of selected financial data;
• A consolidated Balance Sheet, an Income Statement, a Cash Flow Statement, and a statement of changes in stockholders’ equity for the past two years;
• A management discussion and analysis (MD&A) of results and changes over the last two years; and
• Notes to the financial statements that describe accounting policies as well as providing more detailed information in such areas as taxes, pension plans, business segment and geographical breakdowns, related party transactions, and future financial obligations.
• Major aspects of the report an investor should review are the-Income Statement, Cash Flow Statement, and Balance Sheet.

Where should you begin your analysis and research with an annual report? To start, look at:

• Sales, earnings, and various profit margins (from the Income Statement);
• Debt levels and the composition of current assets (from the Balance Sheet); and
• Actual cash flow versus reported income (from the Cash Flow and Income Statements).
• Lawsuits and complaints about the company

The annual report is the single most complete and useful analysis of a public company available.

How do you acquire an annual report?

• Investors holding individual stocks are automatically sent an annual report of the companies they own shares in, every year.

You can call the toll-free number of investor relations department of a company and request an annual report.

• You can download an annual report from the website of some companies.
• Edgar (SEC/Edgar), the financial database of SEC filings, contains the required annual SEC filings—the 10-K report—for most U.S. companies. Search:  www.sec.gov/edgar/searchedgar/companysearch.html

The annual report is probably not only the most objective view of a company you will obtain, but it  also  contains valuable information to help predict a companies future.