An annual report can give you a lot of important information about a company. When you’re a regular stockholder, the company sends you its annual report. If you’re not already a stockholder, contact the company’s shareholder service department for a hard copy.
You can often view a company’s annual report at its Web site. Any major search engine can help you find it. Downloading or printing the annual report should be easy.
You need to carefully analyze an annual report to find out the following:
You want to know how well the company is doing. Are earnings higher, lower, or the same as the year before? How are sales doing? These numbers should be presented clearly in the financial section of the annual report.
You want to find out whether the company is making more money than it is spending. How does the balance sheet look? Are assets higher or lower than the year before? Is debt growing, shrinking, or about the same as the year before?
You want to get an idea of management’s strategic plan for the coming year. How will management build on the company’s success? This plan is usually covered in the beginning of the annual report — frequently in the letter from the chairman of the board.
Your task boils down to figuring out where the company has been, where it is now, and where it’s going. As an investor, you don’t need to read the annual report like a novel — from cover to cover. Instead, approach it like a newspaper and jump around to the relevant sections to get the answers you need to decide whether you should buy or hold on to the stock.