The Annual Report for Stock Investors: Board Chair Letter and Company Offerings - dummies

The Annual Report for Stock Investors: Board Chair Letter and Company Offerings

By Paul Mladjenovic

As an investor in a company’s stock, you want to be able to understand its annual report. Not every company puts its annual report together in exactly the same way — the style of presentation varies. Every annual report does include common basic content, such as the income statement and the balance sheet.

Sections of the annual report include the letter from the chairman of the board and a summary of the company’s offerings.

The letter from the chairman of the board

The first thing you see is usually the letter from the chairman of the board. The chairman’s letter is designed to put the best possible perspective on the company’s operations during the past year. Be aware of this bias. If the company is doing well, the letter will point it out. If the company is having hard times, the letter will probably put a positive spin on the company’s difficulties.

To get a good idea of what issues the company’s management team feels are important and what goals it wants to accomplish, keep the following questions in mind:

  • What does the letter say about changing conditions in the company’s business? How about in the industry?

  • If any difficulties exist, does the letter communicate a clear and logical action plan (cutting costs, closing money-losing plants, and so on) to get the company back on a positive track?

  • What’s being highlighted and why? For example, is the firm focusing on research and development for new products or on a new deal with China?

  • Does the letter offer apologies for anything the company did? If, for example, it fell short of sales expectations, does the letter offer a reason for the shortcoming?

  • Did the company make (or will it make) new acquisitions or major developments (say, selling products to China, or a new marketing agreement with a Fortune 500 company)?

Read an annual report in the same way you read or hear anything from a politician — be more concerned with means than ends. In other words, don’t look for what the goal is, look for how they’re going to get there.

The company’s offerings

This section of an annual report can have various titles, but it generally covers what the company sells. You should understand the products or services that the business sells and why customers purchase them. If you don’t understand what the company offers, then understanding how it earns money, which is the driving force behind its stock, is more difficult.

If a business ceases making money from its specialty, you should become cautious. Here are some other questions to ask:

  • How does the company distribute its offerings? Through a website, malls, representatives, or some other means? Does it sell only to the U.S. market, or is its distribution international? Generally, the greater the distribution, the greater the potential sales and, ultimately, the higher the stock price.

  • Are most of the company’s sales to a definable marketplace? For example, if most of the sales are to a war-torn or politically unstable country, you should worry. If the company’s customers aren’t doing well, that has a direct impact on the company and, eventually, its stock.

  • How are sales doing versus market standards? In other words, is the company doing better than the industry average? Is it a market leader in what it offers? The firm should be doing better than (or as well as) its peers in the industry.

  • Does the report include information on the company’s competitors and related matters? You should know who the company’s competitors are because they have a direct effect on the company’s success.