Annual Reports Highlight Key Financial Data
In the beginning of the annual review, the company gives the shareholders a condensed version of how well the company performed during the preceding year. This condensed info provides the more casual readers with what the company perceives as the main points of interest. At the least, this section contains a summary of operations, earnings per share data, and balance sheet data:
Summary of operations: This summary shows the company’s bottom line net income for at least three years (and preferably five to ten years). Net income is the excess of revenue and gains over expenses and losses during a financial period.
Earnings per share (EPS): This calculation shows the net income per outstanding share of common stock. Read on for an explanation of this formula. Many investors focus on this figure, comparing it to their other investments and to other companies’ EPS in the same industry.
For example, an investor may compare the EPS of The Coca-Cola Company to the EPS of PepsiCo to gauge the value of one company’s stock over the other, given that these companies are in the same industry.
Three calculations you may see in an annual review are basic EPS, diluted EPS, and cash dividends. Here’s an example of each:
Basic EPS: To figure basic EPS, take net income for the financial period and divide it by the weighted average number of shares of common stock outstanding. The weighted average factors in the fluctuations of stock outstanding during the entire year instead of just taking stock outstanding at January 1 and stock outstanding at December 31 and dividing it by two.
If ABC Corp. has net income of $100,000, and the weighted average number of shares of common stock outstanding is 21,833, basic EPS is $100,000 / 21,833 = $4.58.
Diluted EPS: If the company has issued stock options or convertible debt or convertible preferred stock that the investor has the option to convert into common stock, the company has to show diluted EPS, which is a complicated calculation. (Stock options are benefits allowing employees to purchase a certain number of shares of company stock at a pre-determined date and price.)
Diluted EPS calculates earnings per share by estimating how many shares could theoretically exist after all stock options and convertible securities have been exercised into common stock shares. So if ABC Corp.’s weighted average of common stock outstanding after adding in these extras is 24,989, its diluted EPS is $100,000 / 24,989 = $4.00.
Cash dividends: This calculation is the amount per share paid to shareholders of record. The company must have earnings to pay a dividend, because dividends are a payment of earnings. The board of directors determines the dividend paid, if any, to shareholders of record.
Balance sheet data: This section shows selected figures from the balance sheet in which the company believes the shareholders have an interest. For example, the company may show total assets, which are all assets (current and long-term) that the company owns as of the balance sheet date. The company may also show long-term debt, which is any debt the company won’t have paid off within 12 months of the balance sheet date.
The figure shows an example of this condensed financial data.
Even though these figures are compressed, they’re based upon — and must reconcile with — the audited financial statements.