Each year, public companies must release an annual report according to the law. This report explains what the company does and how well it’s doing financially. It helps people who own or might want to buy shares in the company decide what to do with their investments.
Unlike other financial information, annual reports also tell stories and are designed to look nice. They’re like marketing materials. The company sends these reports to its shareholders before its yearly meeting where they vote on things like the board of directors. Often, anyone can find these reports on the company’s website.
The Role of Annual Reports
An annual report tells you important things about the company you work for, like:
- If it can pay its debts on time.
- How much money it makes or loses each year.
- If it’s getting bigger or smaller over time.
- What it needs to keep growing.
- How much it spends compared to how much it makes.
Understanding these details can help you understand what might happen next for your company.
What is in an Annual Report?
An annual report usually has two parts. The first part talks about how the company did in the past year and what it plans to do in the future. The second part is all about the company’s finances.
Here’s what you can find in an annual report:
- Letters to Shareholders – These are messages from important people in the company, like the CEO or CFO, to the shareholders.
- Management’s Discussion and Analysis (MD&A) – This is a detailed look at how the company performed, written by its top executives.
- Audited Financial Statements – These are official documents that show the company’s financial health, like balance sheets, cash flow statements, income statements, and equity statements.
- Summary of Financial Data – This is a summary or explanation of the financial statements.
- Auditor’s Report – This report says whether the company followed the rules when making its financial statements.
- Accounting Policies – This is a summary of the rules the company followed when making the annual report and financial statements.
Annual Report vs. 10-K Report
Public companies must produce a report called a 10-K each year, in addition to their annual reports. The 10-K, required by the US Securities and Exchange Commission (SEC), gives investors detailed information about a company’s financial health before they buy or sell its shares.
Although there’s some overlap in the information, the 10-K and annual reports are separate documents.
The 10-K follows SEC rules and provides a thorough overview of a company’s finances, agreements, risks, opportunities, operations, executive pay, and market performance. It includes detailed discussions about the company’s activities throughout the year and analyzes its industry and market.
Because of the comprehensive nature of the 10-K, it’s longer and more complex than the annual report. It must be submitted to the SEC within 60 to 90 days after the company’s fiscal year ends.
You can access 10-K reports on the SEC website if you need to review them.
Key Sections of an Annual Report
If you’re thinking about investing in a company that’s open to the public, it’s important to check out its 10-K filing. This report gives you a deep look into the company, starting with what it does, any risks involved, legal matters, and the financial figures.
The main parts of the yearly 10-K report usually are:
Business (Item #1) – What does the company do?
Risk Factors (Item #1A) – Possible problems the company might face.
Legal Proceeding (Item #3) – Any legal issues the company is involved in.
Selected Financial Data (Item #6) – Key financial numbers.
Management’s Discussion and Analysis of the Financial Condition (Item #7) – A talk about the company’s financial situation by its management.
When looking at annual 10-K reports, start by reading Item 1, which tells you about the company’s business, customers, and industry.
Then, focus on Items 6 and 7 for the financial details. Check how the company has performed over time, and see if its balance sheet has gotten stronger or weaker.
Look at the cash flow statement to see if the company is making or using cash. Sometimes, a company can make profits but still have negative cash flow. Compare the income statement and cash flow statement for any warning signs.
For instance, consistent cash flow suggests a healthy company, while big cash flow changes might mean trouble. Having lots of cash could mean the company is settling accounts faster than getting new work.
Understanding annual reports can provide valuable insights into a company’s position in its industry and the overall economy. This helps identify opportunities and risks.
You don’t have to be a certified accountant to grasp financial information. Start by examining financial documents regularly. When annual and 10-K reports are released, you can understand what company leaders say about its performance.
For investors, deciphering annual reports offers more data for investment decisions. For employees, it’s crucial to learn how to interpret these reports to grasp the company’s objectives and improve career prospects.