Whether you are a seasoned investor or a newbie in the trading and investing market you are bound to read or understand an annual report of a company. If you already know what we are going to talk about then it’s good, but if you don’t know what an annual report is, then don’t worry we will be talking all about how to read the annual report of a company clearly in this article.
We will be talking about what to see in a report and how you can understand any annual report effectively. We will see how you can read the annual reports effectively so that you can decipher the actual condition of the company by reading it in between lines so that you always make the right decision in your financial journey.
What Is An Annual Report?
An annual report is the most important piece of paper when it comes to understanding the financial state of a company. By understanding it clearly an investor can decide to buy a stock of the company.
The annual report is a report that is published by the end of the financial year, and all the data available in the report is official and is of great interest to its investors and shareholders as it provides the insight of the company and investors can take all the primary data to make decisions. What most investors seek in the reports are the litigations, customer retention and all sorts of risk factors associated with the company.
The annual report contains many sections containing different informations like:-
- Financial highlights
- Management statement
- Discussions and analysis
- Corporate informations
- Report on governance
- Legal proceedings
You should remember that no two annual reports are the same, they are all tailor made to display the company’s performance taking in account the sector and the industry they operate in. although some information is common in most of the annual reports.
How To Read An Annual Report?
There is no best way to read the report but we can share an effective way to start analyzing it.
- Start with the business description, it tells us all about the business, the sector and the industry it covers along with its customer base revealing who all they are and company’s action to retain them.
- After you understand the business go towards the financial data, it reveals the financial performance of the company in the past years whether it has become stronger or weaker. An investor should know how the company has performed
- Next comes the cash flow statement which tells us if the company has generated cash or used it. Oftentimes a negative cash flow is a red flag.
- Look for unusual risk factors such as legal case/ proceedings, litigations. While looking, you might look for statements like “ our industry is highly fragmented with many competitors”, or “ Our stock price may experience periods of volatility” and many more. Keep in mind that litigations and lawsuits must be assessed but many of them aren’t that serious as they seem.
Remember if you are a newcomer in the market then focus on what you understand, so don’t try to assess everything that is given in the report or you might end up understanding nothing.
We have listed a few segments of the annual report below:
As the name suggests it contains information about the finances of the company. The company can also include some key financial ratios that are calculated by the company itself. This section should be focused on the profit/ loss statement, balance sheet and the cash flow statement.
Management Discussion And Analysis (MDA)
It is a very important part of the annual report as it reveals the true picture of the present and the future of the company. Through the discussions of its management we can translate the vision of the company. It focuses less on the financial and more on the business strategy, plans and implications of the company.
Balance Sheet And Cash Flow
This shows us how profitable the business is and how much return its assets are generating for the company. Cashflow shows us how much profit is actually profit for business and not by other activities, the main objective of reading cash flows is to check whether the company will be able to survive any downfall in case it occurs.
In a nutshell the annual reports of the company tells us everything there about the company so as an investor you must spend your time and energy going through the reports. Unfortunately for many investors, they fail to read in between the lines of the report. While these annual reports do not lie or deceive you as an investor must look at them carefully and try to understand what they really mean and show about the company.
We must try and understand that the best way to analyze a company is through their annual reports, while many people give out false information about the company the only true way to analyze the company would be through effectively analyzing the annual reports that it publishes.