How to Read an Annual Report - Part 2
The Financial Statement
The financial statement area usually includes the Income Statement, Balance Sheet, Statement of Cash Flows, Statement of Shareholders' Equity, and Footnotes.
The Income Statement shows the company's performance during the past year and whether or not its operations have resulted in a profit or loss.
The Balance Sheet is a snapshot of the company at the end of the past fiscal year. Assets include all of the company's goods and property and can include receivables and prepaid expenses. Liabilities include all debts and unpaid expenses as well as future payments and deferred income.
Shareholder Equity is the shareowners' interest in the company; it is the difference between what the company owns and what it owes.
The Cash Flow Statement should allow you to see if adequate amounts of cash are being generated. You should also be able to understand from where the cash is coming and how it is being handled. The Shareholders Equity Statement should give greater clarity to changes in the equity section of the Balance Sheet. Changes here often can be traced to corporate profits or losses, changes in dividend payments, and the issuance or repurchase of company stock.
At the end of these statements come the footnotes. You should take the time to read them because they can provide some important details and explanations to various items mentioned in the previous reports. They should help to explain why certain things have been done the way they have and increase, not decrease, your comfort level. Pay special attention to any notes relating to income and expenses. Information on expensing employee or executive stock options may be found here, and you can look at the possible impact this may have on future financial results.
Usually, the financial section of an annual report will end with the Auditor's Report. This is an opinion letter from the accounting firm that has reviewed the company, typically stating that the company has used generally accepted accounting standards in compiling and reporting its financial results. Remember, however, that it is not an endorsement or a statement that the company's stock is currently a good buy. Check to see if the opinions are "qualified" or "unqualified." If any parts of the opinions are qualified, check them carefully to understand what is being questioned and the possible impact it may have. Also, look for "exceptions" to "standard procedures" and determine whether they represent any significant issues. For example, significant profits may have been generated from the sale of a business or other asset, and you should be aware that this is a one-time event.
If you are not familiar with accounting terminology or methods, questions on the points noted above provide a good opportunity for you to call the company's investor relations department. They should be able to tell you in plain English the meaning of any significant auditor notes or comments. If you receive an answer you don't understand or that makes you uncomfortable, either keep questioning or else move on and consider a different stock to purchase.
The management, and other items of corporate information provided in an annual report are worth studying. What is the age of the management team and how long has it been together? What happens at retirement if they are all the same age? Do you consider it a positive or a negative that every officer and half of the directors have the same last name? Does the board represent enough variety in both talent and experience to move the company forward?
Directors often are compensated, and you should make sure that the company's policies on compensation are stated, clear and reasonable. Compare them to other companies of the same size and structure. How much company stock do the directors own, and are they buying or selling? Do you want them to have a significant stake in the company in which you are planning to invest? Are they costing the company too much in relation to its size and the value that they can provide?
Finally, a good annual report will make it easy for you to contact the company to discuss any questions or concerns you may have. The report will list phone numbers, e-mail addresses or website addresses for the company's investor relations or shareholder relations department. Most companies have a website that may contain a wealth of additional information to make it easier to communicate. Many such sites also contain prior years' annual reports for you to read and compare.
The bottom line is that annual reports can be a valuable resource for fundamental information about publicly traded companies. While investors need to gain skill in looking beyond the sleek marketing spin that can be evident in some of the company's written outlook, important details can be found regarding the potential for future growth opportunities. However, one must be willing to spend the time reading, thinking, and analyzing. Investors will need to take the time to learn how to read and decipher annual reports in order to understand what they are looking for, and these two sections (Parts 1 & 2) can serve as a good starting point for you!
A great deal of important information is sitting within quarterly and annual reports, but investors need to know how to actually mine this information. The more an individual knows about a particular company, the more likely the decision to invest in that company will be a sound one!
* * * * *
The financial statement area usually includes the Income Statement, Balance Sheet, Statement of Cash Flows, Statement of Shareholders' Equity, and Footnotes.
The Income Statement shows the company's performance during the past year and whether or not its operations have resulted in a profit or loss.
The Balance Sheet is a snapshot of the company at the end of the past fiscal year. Assets include all of the company's goods and property and can include receivables and prepaid expenses. Liabilities include all debts and unpaid expenses as well as future payments and deferred income.
Shareholder Equity is the shareowners' interest in the company; it is the difference between what the company owns and what it owes.
The Cash Flow Statement should allow you to see if adequate amounts of cash are being generated. You should also be able to understand from where the cash is coming and how it is being handled. The Shareholders Equity Statement should give greater clarity to changes in the equity section of the Balance Sheet. Changes here often can be traced to corporate profits or losses, changes in dividend payments, and the issuance or repurchase of company stock.
At the end of these statements come the footnotes. You should take the time to read them because they can provide some important details and explanations to various items mentioned in the previous reports. They should help to explain why certain things have been done the way they have and increase, not decrease, your comfort level. Pay special attention to any notes relating to income and expenses. Information on expensing employee or executive stock options may be found here, and you can look at the possible impact this may have on future financial results.
Usually, the financial section of an annual report will end with the Auditor's Report. This is an opinion letter from the accounting firm that has reviewed the company, typically stating that the company has used generally accepted accounting standards in compiling and reporting its financial results. Remember, however, that it is not an endorsement or a statement that the company's stock is currently a good buy. Check to see if the opinions are "qualified" or "unqualified." If any parts of the opinions are qualified, check them carefully to understand what is being questioned and the possible impact it may have. Also, look for "exceptions" to "standard procedures" and determine whether they represent any significant issues. For example, significant profits may have been generated from the sale of a business or other asset, and you should be aware that this is a one-time event.
If you are not familiar with accounting terminology or methods, questions on the points noted above provide a good opportunity for you to call the company's investor relations department. They should be able to tell you in plain English the meaning of any significant auditor notes or comments. If you receive an answer you don't understand or that makes you uncomfortable, either keep questioning or else move on and consider a different stock to purchase.
The management, and other items of corporate information provided in an annual report are worth studying. What is the age of the management team and how long has it been together? What happens at retirement if they are all the same age? Do you consider it a positive or a negative that every officer and half of the directors have the same last name? Does the board represent enough variety in both talent and experience to move the company forward?
Directors often are compensated, and you should make sure that the company's policies on compensation are stated, clear and reasonable. Compare them to other companies of the same size and structure. How much company stock do the directors own, and are they buying or selling? Do you want them to have a significant stake in the company in which you are planning to invest? Are they costing the company too much in relation to its size and the value that they can provide?
Finally, a good annual report will make it easy for you to contact the company to discuss any questions or concerns you may have. The report will list phone numbers, e-mail addresses or website addresses for the company's investor relations or shareholder relations department. Most companies have a website that may contain a wealth of additional information to make it easier to communicate. Many such sites also contain prior years' annual reports for you to read and compare.
The bottom line is that annual reports can be a valuable resource for fundamental information about publicly traded companies. While investors need to gain skill in looking beyond the sleek marketing spin that can be evident in some of the company's written outlook, important details can be found regarding the potential for future growth opportunities. However, one must be willing to spend the time reading, thinking, and analyzing. Investors will need to take the time to learn how to read and decipher annual reports in order to understand what they are looking for, and these two sections (Parts 1 & 2) can serve as a good starting point for you!
A great deal of important information is sitting within quarterly and annual reports, but investors need to know how to actually mine this information. The more an individual knows about a particular company, the more likely the decision to invest in that company will be a sound one!
* * * * *
posted by Bob Moser at
2:41 PM
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