“When I take a look at a company’s annual report, if I don’t understand it, they don’t want me to understand it.”
Warren Buffet
Cut the Fluff and Find the Meat in Six Main Areas
So you’ve done the research and gone and got yourself a share of equities or a mutual fund. Now, you’ll receive an annual and quarterly reports, as an investor / boss of the organization.
The SEC makes publicly-held companies submit a Form10-K. This is a complex and long annual report that must include: description of the business, financials of the company over the last five years, management’s POV on previous success and forthcoming years, and the basic four financial statements: balance sheet, income statement, statement of cash flows, and statement of shareholders equity.
You can also access annual reports for any public company even if you don’t own a share. Not all annual reports are consistent; each corporation publishes totally different reports – even the financial statements. They do feature similar sections where we can find the meat of the report and cut through the BS.
The Six Important Things:
- The Footnotes: This is all the good stuff! Management often includes notes throughout the annual report that illustrate otherwise clandestine material information. Footnotes may reveal juicy facts, like “who holds the power,” where money is being appropriated, and product releases on the horizon.
- Forward Looking Statements: Management often wants to admire the wake in these annual reports. You should look to the front of the ship – where the company is going. Forward looking statements try to show where the company will be in the next period. This could influence whether or not consumers buy shares, and ultimately drive share price up or down. Companies that share these statements quarterly are typically more valuable as the data is more recent and accurate.
- Income statement: The income statement typically includes revenue, expenses, gains, losses, operating income, net sales, cogs of goods (COGs), and net income. It might also include the earnings per share under the net income.
- Earnings per share = Net Income / Avg. number of shares of common stock outstanding during the period
- Balance Sheet: The all-important balance of a company’s Assets, Liabilities and Equity (or Retained Earnings).
- Remember: Assets = Liabilities + Equity
- Need a refresher? Visit our post on Balance Sheets here.
- Statement of cash flows: This shows three primary sources and outflows of money:
- Operating activities: Income earned computed by eliminating noncash items from net income
- Investing activities: The purchase and sale of productive assets and investments
- Financing activities: Borrowing and repaying loans, issuing and repurchasing stock, and paying dividends.
- At the bottom, the statement typically shows the total change in cash and an end of year cash total that reflects what’s shown on the balance sheet.
- Need a refresher? Check out the cash flow post here.
- Statement of Shareholders Equity: Important as “a picture of how the business is performing, net of all assets and liabilities.” This can help shareholders see how the business is performing once we account for expenses. Also, it shows how a company might fare in a downturn (do we have enough in the coffers?) and if a company might decide to use their retained earnings to issue a dividend.
One more thing: You can check out any publicly-traded company’s 10-K and other filings at the EDGAR search site here.
