The Annual Report for Stock Investors: Financial, Management, and Stock Information

Before you invest in stock from a particular company, you want to be aware of their financial information and other factors that could affect the future value of the company. The annual report tells you this information. Here are some of the sections included in a company’s annual report.

Financial statements

Look over the various financial statements and find the relevant numbers. Every annual report should have (at the very least) a balance sheet and an income statement. Catching the important numbers on a financial statement isn’t that difficult to do. However, it certainly helps when you pick up some basic accounting knowledge.

First, review the income statement (also known as the profit and loss statement, or simply P&L). It gives you the company’s sales, expenses, and the result (net income or net loss).

Next, look at the balance sheet. It provides a snapshot of a point in time (annual reports usually provide a year-end balance sheet) that tells you what the company owns (assets), what it owes (liabilities), and the end result (net worth). For a healthy company, assets should always be greater than liabilities.

Carefully read the footnotes to the financial statements. Sometimes big changes are communicated in small print. In current times, especially be wary of small print pointing out other debt or derivatives. Derivatives are complicated and (lately) very risky vehicles. Problems with derivatives were one of the major causes of the market turmoil that destroyed financial firms on Wall Street during late 2008.

Derivatives are a huge land mine, and large money center banks still carry them. According to the Bank for International Settlements, major money center banks are carrying more than 500 trillion dollars’ worth of derivatives. Derivatives are especially worth being aware of if you’re considering bank or other financial stocks for your portfolio.

Summary of past financial figures

The summary of past financial figures gives you a snapshot of the company’s overall long-term progress. Some reports summarize three years, but most go back two years.

Management issues

The annual report’s management issues section includes a reporting of current trends and issues, such as new developments happening in the industry that affect the company. See whether you agree with management’s assessment of economic and market conditions that affect the firm’s prospects.

CPA opinion letter

Annual reports typically include comments from the company’s independent accounting firm. It may be an opinion letter or a simple paragraph with the accounting firm’s views regarding the financial statements.

The CPA opinion letter offers an opinion about the accuracy of the financial data presented and information on how the statements were prepared. Check to see whether the letter includes any footnotes regarding changes in certain numbers or how they were reported. You should verify the numbers by looking at the company’s 10K document filed with the Securities and Exchange Commission (SEC).

Company identity data

The company identity data section informs you about the company’s subsidiaries (or lesser businesses that it owns), brands, and addresses. It also contains standard data such as the headquarters location and names of directors and officers. Many reports also include data on the directors’ and officers’ positions in stock ownership at year’s end.

Stock data

The stock data section may include a history of the stock price, along with information such as what exchange the stock is listed on, the stock symbol, the company’s dividend reinvestment plan (if any), and so on. It also includes information on stockholder services and who to contact for further information.

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