In order to be a successful investor, most experienced investors would agree that it is important to understand as much as possible about what you are investing in. Fortunately, the SEC, or Securities and Exchange Commission, requires companies to publish a number of documents that provide valuable information on a regular basis. The annual report is one of these documents. Taking the time to read and understand it can help investors gain valuable information and make better investing decisions.
The typical annual report is divided into a number of sections. The first major section is typically a narrative section that typically includes a company overview, performance or year in review, and forward-looking statements. This is a chance for the company to provide information about the history and trajectory of the company that might not be apparent in the company’s financial documents.
For example, in this first section a retail company like Target or Costco might describe its expansion strategy from the past several years and also detail how it intends to expand and build new stores in the upcoming years. In addition to providing information about its growth strategy, it might describe how it plans to increase its store size so that it can sell a wider range of products to suit its customers’ needs. This type of information can help investors to better understand a company’s competitive strategy and make a determination about whether the company is likely to be successful in the years to come.
The next section of the annual report is financial documents section where the company publishes its income statement, balance sheet, cash flow statement, auditor’s report, and from time to time, graphs and charts to illustrate points about their financial position.
The auditor’s report typically is included to reassure investors and others reading the annual report that the company’s financial documents accurately represent a company’s financial condition and results. The auditor is typically an independent third -party hired by the company to certify its financial documents.
The income statement shows how much revenue the company made, how much it paid out in expenses, and based on these amounts how much net income it made over a time period. Studying this document can help you better understand a company’s profitability.
The balance sheet shows a company’s current financial position. It displays the value of the company’s assets, liabilities, and shareholders’ equity. The current balance sheet, especially when viewed alongside previous balance sheets, can give you an idea of how well a company has been managing its finances.
The cash flow statement shows how much cash has moved in and out of the company during a specific time period.
This document, which is derived from both the income statement and balance sheet, can help give you additional information about how effectively a company is managing its money.
On top of simply displaying the financial documents, companies usually provide some description about these documents in the annual report. They might explain certain things like why a company took on more debt, issued new stock, or had higher expenses compared to previous years.
Not everyone takes the time to read the annual report, because it is typically lengthy, and frankly, boring to most people. However, ignoring it can be a big mistake. If investors take the time to read and understand this document, they will understand more about a company than the average investor, and therefore have an edge when it comes to making investing decisions.