An annual report is a financial document that a public company prepares for its shareholders. These reports are can be used by potential investors and securities analysts to evaluate a company’s stock.
The report is usually the best source of information for most people to determine the financial health of a company.
An annual report gives a basic overview of the company over the past year. It usually includes: an opening letter from the CEO, a business profile, a management analysis, and financial data.
Here’s a basic overview of what is contained in an annual report:
This is generally the first part of an annual report. The chairman’s letter will set the tone, establish a theme, and most importantly summarize the report for the readers. The letter will highlight the company’s accomplishments for the year, as well as the company’s failures. The letter will state what led to the company’s successes and will also address how it dealt with its failures or issues.
The chairman’s letter will provide an analysis of overall business performance, insights into the markets it’s in, and any opportunities for growth. The letter will also point out any challenges or risks facing the company such as changing market conditions, recent scandals, consumer trends, etc. The letter often ends by giving a sense of corporate direction for the next year.
The business profile is a basic element of an annual report. This section describes the company including: what it does to generate revenue, its products/services, its operations, subsidiaries it owns (if any), the market it is competing in (including competitors), and risk factors for the business. Major changes made in the past year are also highlighted such as new products, sales/marketing shifts, new services, seasonal factors (ex the holiday season), or any special operating costs.
In this section, management discusses the company’s operations in detail. Management will compare this year’s results to results from the past. Management will often use charts and graphs to highlight the most important data. Towards the end of the analysis, management will outline its own expectations and plans for the company’s future growth.
What’s a report without numbers? In the report, the company presents the basic financial statements. Most businesses won’t provide all of the financial statements because that generally causes information overload and most readers of the report won’t go through everything.
The statements most companies will include are: the consolidated balance sheet, the income statement, the statement of cash flows and the statement of shareholders. Some companies will include more financial information depending on their industry and size. This section includes an independent auditor’s report to confirm that the company’s financial statements are fairly presented and in conformity with generally accepted accounting principles.