Annual Reports: What They Are and Why Investors Care
A Company's Annual Report to Stockholders Is Among Its Most Important Documents
If you want to keep tabs on a company's business operations, take a look at its annual report. Whether you're interested in becoming an owner by purchasing stock or lending money to the company by purchasing bonds, the annual report will show you important information about its business activities. You can use the report alongside the rest of the firm's financial statements to evaluate it as a potential investment.
What Is an Annual Report?
An annual report is a document prepared by the company to deliver important corporate information to its shareholders. It will typically contain a letter from the chief executive officer, data regarding the company's finances, and information about business activities during the previous year.
The first half of the annual report might be devoted to company information, industry trends, and other news, while the back half usually contains financial data. Sometimes a company will use its annual report as a marketing opportunity to tell its story or as a reminder to shareholders of its track record.
What Can You Learn From an Annual Report?
In addition to hard financial facts such as sales, expenses, and profit, you can also learn more about context in which the business operates as well as its culture and leadership.
Many CEOs work long and hard on their letter to shareholders, using it as a chance to provide insight into the state of the sectors or industries the company is part of.
A CEO letter may detail the nature of the competition faced by the firm, any challenges or opportunities it's encountered, an explanation of the causes behind the figures in the financial section, or insight into the future of leadership at the business.
The tone and content of an annual report can give you important clues about the type of company in which you are entrusting your capital. Look for signs of shareholder-friendly management that let you know you're dealing with people who are interested in protecting your assets, such as:
- A clear dividend policy
- Executive-owned stock
- Reasonable executive compensation
- Honest communication
As you gain experience, you'll also learn to recognize signs that you're dealing with a company that shouldn't be trusted or isn't competent. A firm's annual report is a good starting place to scout for these signals.
How Is the Annual Report Different from the Form 10-K Filing?
The U.S. Securities and Exchange Commission (SEC) requires publicly-listed companies to file a Form 10-K, which is a detailed and comprehensive overview of a business's financial activity. The Form 10-K will include the income statement and balance sheet, financial statements, and legal disclosures, among other information.
If the Form 10-K filing is regular Coca-Cola, the annual report is Diet Coke. It can be a more accessible way to take in the company’s finances, business, and management philosophy. The main audience of an annual report is the shareholders—not financial regulators, as it is with Form 10-K.
While a Form 10-K can be hundreds of densely-packed pages, the annual report, on the other hand, is often attractively designed, with lots of pictures, colorful graphs, and images of smiling employees.
Be aware that different companies will handle their annual reports and Form 10-Ks in different ways. Some will focus on a lengthy and comprehensive Form 10-K and a short annual report, and some will have no annual report at all. Others may compile an extensively detailed annual report and point to it as a reference from within the Form 10-K.
The bottom line is that you need to read both the Form 10-K and the annual report to get a full understanding of a company. Don't throw your money into an enterprise based on emotion; do your due diligence and read the report.
How Do I Get a Copy of a Firm's Annual Report?
Most companies post their annual report on their website, making it simple to see an annual report for any firm you're interested in investing in. You can usually find it under a section labeled "For Investors," "Investor Relations," or something similar. You can also call or email the investor relations department and ask for a copy of the report to be mailed to you.