How to Read an Annual Report

Every publicly traded company is required by the SEC(Securities and Exchange Commission) to provide annual reports to it's shareholders, and the general public as well. These annual reports contain very important financial information, as well of summaries of the companies progress made by the CEO, board members, etc. I use annual reports to decide whether or not im going to buy stock in that company.

How to obtain an annual report - There are basically two ways to get an annual report from a company. The first way is to call the Investor Relations department of a company and asked to have an annual report be sent to you. They send the annual reports free of charge to you, and it would usually arrive in 4 to 5 business days. These annual reports look like magazines, and are very professionally prepared. Usually if you go to the website of the company you're researching, they will have a "Investor Relations" link, and then you can fill out an online form with your name and address to recieve an annual report.

The second way to get annual reports from a company is to go to The SEC's Website at http://www.sec.gov. If you click on "Search for Company Fillings" located under "Filling and Forms", you'll be taken to a webpage called "Search the EDGAR Database". On that webpage, click on "Companies & Other Filers". Then enter the name of the company you need an annual report form, and then click "Find Companies". Look for a report labeled "10-K". That will be their the companies annual reports. Now the reports on the SEC's website are in no way glamourus! They are just in basic text format, and can be very boring to read. But, they provide the same important information from the company.

Inside of the annual report, you will find many things that are useful in helping you decide whether or not to invest in that company. Here's what you'll find in just about every annual report:

Corporate Profile - This is just a small summary of the basic operations of the company, what the company does, etc.

Letter from the President - This is a letter written by the president or CEO of the company, and most of the time the letters talk about the financial successes of the year. This letter may also mention major contracts or partnerships the company has formed, and give a general analyzation of the companies revenues and sales. Be careful when reading the letter from the President, because the business could be running to the ground, but while reading the letter you may get the immpression that all is well!

Independent Auditors' Report - Before a company can distribute their annual report to the public, the financial information inside of the annual report must be checked for accuary so shareholders are not misled. That's the job of the independent auditor. They auditing firm will search for evidence that supports the financial information in the Income Statement, Balance Sheet, etc., and then will write a letter if all is well.

Income Statement - The income statement in the annual report shows the net income or net loss for that particular year. It also shows net sales, cost of goods sold, and the expenses of a company. Income statements from different years can be compared to see if the company is improving financially. I like to compare income statements from the past 5 years, to see if the net sales and net income of a company is increasing.

Balance Sheet - The balance sheet shows the business' assets, and liabilities. The assets are listed in order of liquidity. The quicker an asset can be converted to cash, the more liquid it is. That is why Cash is at the top of the list of assets, because it is the most liquid asset. Under assets you may see items such as Accounts Recieveable (the amount of money that's owed to the company), Property and Equipment, and Other Invesments. In the list of Liabilities, you'll see items such as Accounts Payable (The amount the company owes to other businesses), Income Taxes Payable, and Long-term Debt.

Cash Flow Statement - The cash flow statement shows how the money the business makes, is moving in the business. The cash flow statement also shows if the business was able to increase their cash on hand during the year or not.

Risks - Usually in the back of the annual report, you'll find the risk that are associated with the business. Reading all the types of things that can affect the business is depressing, especially if you own stock in that company. But, to get a good idea of what can affect a business, reading the risks section of the annual report is the best way to go.

Michael Press is an investor and teenage entrepreneur. He currently owns and operates PassiveIncomeInfo.com, a free website with articles about how to build wealth. He also writes for and distributes the Creating Wealth E-zine.

---

Buy and Hold Investment Strategy

"Buy and hold" is one of the most heralded investment... Read More

Trading Tips No 6: The High Cost of Low Cost Stock Market Information

It has been said that low cost or even free... Read More

Invest, Be Wrong, and Make Money in the Stock Market

I have been trading for several decades and was an... Read More

The Exclusive Club of Large Caps

Picture one of those clubs where only the real heavyweights... Read More

Understanding Stock Market Indexes

A stock market index is a statistical measure of changes... Read More

Analysts - Do They Really Know The Stock Market?

When you become interested in a stock or mutual fund... Read More

Making Outsized Returns in the Stock Market - Using the Dow Theory

The Dow TheoryCharles H. Dow... Read More

How to Read an Annual Report

Every publicly traded company is required by the SEC(Securities and... Read More

Enronization

Even if you don't own any of their stock or... Read More

Advantages and Disadvantages of Mutual Funds

Outlined below are some of the advantages and disadvantages of... Read More

The 10 Commandments

Wall Street has been preaching for years and years to... Read More

A Stock Market Investment Strategy

I feel that an investment strategy in the stock market... Read More

The I Word is Coming to a Town Near You

Hello Inflation, it has been awhile, I see you on... Read More

Investment Capital Gains

Have you bought any mutual funds this year or late... Read More

Lies, Damn Lies and Mutual Fund Returns

How many times has this happened to you? You're at... Read More

Evaluation I

An insane person cannot evaluate an insane evaluation system.As you... Read More

Moving Averages

Every day on CNBC-TV they show a 200-day moving average... Read More

Mutual Funds: The Modern Den of Thieves!

Mutual funds were created with the idea that one person... Read More

Investment Clubs

Because you don't feel too sure about which stock or... Read More

Complacency

During the month of January the Dow Jones Industrial Average,... Read More

The Surgeon General

The Surgeon General of the United States says that smoking... Read More

Its A Duck

If it walks like a duck, quacks like a duck... Read More

What Are You Waiting For?

Do you own any mutual funds? In an IRA or... Read More

Lights of the Stock Market

There are red lights, green lights, blue lights and spot... Read More

Choosing An Investment Stock Broker

If you want one.And I don't recommend any broker with... Read More

Trend Trading - Trading Stocks Using Technical Analysis and Swing Trading Strategies

Peter is a professional trader, Paul is not. Peter has... Read More

Frog In The Pot

You remember the story about the frog that was put... Read More

Planning Your Dive and Diving Your Plan ? Trading!

A colleague of mine just returned from a scuba diving... Read More

Stock Loans

Hedge current portfolio positions and gain access to capital resources... Read More

The Top 10 Reasons to Invest in Mutual Funds

Everyone who follows the financial news has heard of mutual... Read More

Dont Spend Another Dollar on Business Opportunities Until You Read This

With an insecure job market, overworked employees, insufficient retirement savings... Read More

KISS Formula

There are formulas for just about everything, but it has... Read More

Understanding the Bulls and the Bears

If you've ever flipped on the television to CNN Financial... Read More