One of the best skills you can learn as an investor is understanding how to navigate your way around a company’s annual report. It may sound a little dry, but even just a basic grasp will put you head and shoulders above the majority of retail investors.
What is an annual report?
This is a document provided to shareholders that outlines a company’s financial performance over a yearly period. It also gives an overview of what’s been going on with the business throughout the year, and reveals what the firm is hoping to achieve moving forward.
Some companies also use the annual report as a prospectus to reassure existing shareholders, attract new investors and show the world what a successful company it is.
This can make annual reports more interesting to read than pure financial statements, because it’s not just all about the numbers. However, it’s in a company’s interest to paint themselves in the best light possible, so take things with a pinch of salt and try to remain objective.
How long is the report?
The length can vary. On average, you can expect them to be 100–150 pages in total. But, there are plenty of reports that are both longer and shorter than this range.
Often, you don’t need to read the whole thing. It can be useful to set yourself a time limit to review it, helping to make sure you don’t get too bogged down in the details and avoid going down a rabbit hole.
What are the key sections included in an annual report?
The main areas and important factors within an annual report include the:
- Summary and analysis from the CEO or senior management
- Industry insights
- Financial overview
- Income statement
- Balance sheet
- Cash flow statement
- Accounting policies
The financial aspect of the annual report can often be the most insightful because it’s made up of cold, hard numbers and there’s no place to hide.
Other sections that are more subjective can still be useful and interesting, such as discussions about the company’s place in its industry and in the wider economy. A firm won’t lie, but there’s little incentive for it to highlight any negatives.
How do you find the annual report?
You’ll often find these documents in the “investor relations” section of most companies’ websites. If you can’t locate them on the website, you can contact the company directly to request a copy, or search for it on an online database.
Sometimes there can be different versions. For example, an online copy may contain videos and moving images, whereas a downloadable copy or a hard copy will be static in how the information is presented.
Back in the old days, if you were a shareholder you’d receive a copy in the post or from your broker. But that’s a lot of paper and postage stamps, so it’s much easier and cheaper to keep everything digital.
Simple step-by-step guide for reading annual reports
When you first take a look at an annual report, it can feel slightly overwhelming if you don’t know where to start. Even the fancy infographics and comments from the CEO can quite easily go over your head.
So, to help break things down for you, here’s a detailed step-by-step guide on the basic way to read an annual report:
- Read the letter to shareholders. This will give you a broad overview of the company from last year. You’ll get a surface-level insight into where the company is at, and you can grasp from the general tone of the comments whether it’s been a good or bad year.
- Review the risk factors. Most annual reports will give you a narrative explaining any immediate and future risks to the company or industry. Reading this gives you some context as to where the business fits into its sector and its wider challenges.
- Look at the numbers. There should be a summary page with an overview of the company’s financials and key performance indicators. If you’re not a finance whizz, this is a great way to get a bird’s-eye view of the money side of things.
- Dig into the income statement. Read it top to bottom to see how much money the company is making. The key parts will be “net sales”, “operating income”, and “net income”. If you cast your gaze horizontally, you should be able to see how this stacks up against past years.
- Check the cash flow. Look at the starting and final cash balance for the year. Check what caused the balance to go up or down. Again, you can look top to bottom for a full breakdown of the year, and then look horizontally to see how it compares to previous years.
- Evaluate the balance sheet. This allows you to explore the assets and liabilities of the company. It will show you what the company owns and if it’s financed by debt or equity.
- Make your own summary. You don’t have to write this down, you can do it in your head if you like. Based on what you’ve learned from the report, think about whether you believe the company to be in a good position. Or, if you’ve spotted some red flags that require more research.
When do annual reports get released?
It will depend on the company in question. Each business will have its own fiscal year, which often doesn’t run along the same dates as a calendar or tax year.
The annual reports usually get released 1–2 months after the end of the fiscal year, but sometimes it will be a little longer, up to 3 months. So the exact release date of these reports will vary between companies.
Which companies release yearly reports?
Many private companies also create an annual report, but sometimes this isn’t made public. It’s also less relevant because you probably won’t be investing regularly in private equity.
Steps to take after reading an annual report
It’s a great idea to think about your own conclusions. Perhaps jot down some notes or type a few key points from what you’ve read.
You can then see how your thoughts compare to expert analysts. Everyone will have access to the same annual report and it’s worth seeing if your takeaways are similar to other investors.
There will likely be some similarities and differences. If what you’ve discovered is completely different to what others have seen, it may be worth reviewing things again. It’s important to have your own opinions, but when you’re just learning to read annual reports, it can be a good idea to learn from the pros.
Reading annual reports is an excellent skill to have as an investor because it will give you a great overview of a company. It will also provide some useful insights into a business’s finances. But, it’s important to take your time when looking at things and it’s always worth getting a second opinion.
Also, keep in mind that most companies will try to show its annual performance in the best possible light to make it appear attractive to investors and shareholders.
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