How to Analyze Annual Reports
Reading through an annual report can be a daunting task, but there is a lot to cover in the course of a year. Beware of reports that are thin with lots of glossy photos and very little text, which may not be official annual reports. A thorough annual report to the U.S. Securities and Exchange Commission, which is a public record and required for publicly traded companies, is made up of numbers, not pictures and words. Follow a few guidelines for identifying key information and plan on reading all of the footnotes.
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Instructions
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Wading through too much, or not enough, information
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Look for an executive summary or a section entitled "Letter to Shareholders" before you begin reading the report cover to cover. This won't give you all of the necessary information, but it should provide an overview and highlights of the year. It may also note where in the report the highlighted information is located, saving you the time of leafing through a table of contents and indexes.
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Focus on the major aspects: revenues, expenses, debt service (amount of interest paid on loans), assets, value of assets, company objectives and forecasts, and financial statements. There is somewhat of a standard format for annual reports by publicly traded companies, but terminologies for describing business activities may vary. There will also be an analysis section that may provide anecdotal examples of the company's success and plans for the future, but don't put too much weight on it for analyzing the financial health of a company if it does not provide numbers and examples containing numbers.
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Pay attention to the footnotes and proxy statements that disclose how much some executives are paid. According to the Investigative Reporters and Editors (IRE) Inc. "Reporter's Handbook" (Reference 1, ), footnotes can clarify situations where a company claimed to be making a profit when in fact it was only earning on things unrelated to product sales, such as pension funds or interest on bank accounts. According to the IRE, a typical annual report to the SEC contains at least 15 pages of footnotes.
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Check for verifications in the report by an independent accounting firm, which may be toward the back of a document. That lends authenticity that the numbers you're reviewing are accurate.
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Tips & Warnings
Charities and nonprofit agencies also maintain annual reports, and the format should be similar to that as a publicly traded company. Audit reports for municipalities and school districts are also similar.
According to the Investigative Reporters and Editors Inc. "Reporters Handbook," (Reference 1) there are several different documents issued by companies that should not be mistaken for official annual reports, including quarterly updates, reports of securities purchased and glossy, abbreviated annual summaries that are mailed to shareholders.
