Annual Report – A Mainstay of Information!

This is truly a treasure trove of basic information – just recall that it is also a marketing document to investors and will paint a very rosy picture of the company.  Some of the key data are:

•       General Corporate Information.

•       Chairperson’s statement.  Normally complete fluff that the Chairperson most likely didn’t write but did review prior to signing; expect only the good news, great progress and wonderful futures here!

•       Operating and financial review.  Each division or sub-business unit within the company structure will be reviewed for their individual results.  Look for the stars and dogs of the company.  For years, the General Electric report was a glowing review of every division except for the consumer appliances and light bulb divisions – they eventually were sold….

•       An audited balance sheet (they can’t lie here – but they can apply many different accounting policies and principles (FASB) in accordance with variations or interpretations allowed by accounting rules and regulations – and they do tend to hide many things in this particular financial report!)

•       An audited cash flow statement.  Same issue as with the balance sheet.

•       An audited profit and loss statement.  Same issue as with the balance sheet.

•       Accounting policies that they use in the report.  Pay close attention to this area as it can be very impactful on the financial statements. 

•       Notes to the financial statements.  These are the nuggets that you’re looking for.  In these notes they will disclose how they are interpreting or applying accounting principles. 

•       Director's Report.  Another canned letter written for the Chairman of the Board of Directors on their assessment of the company’s performance.  I would skip this – it rarely contains anything of real marketing value.

•       Auditors report.  The auditors will provide a brief letter that will explain that they have reviewed the books and financial statements of the company and that they either concur with the calculations or that they have found exceptions.  The latter never happens.  The company will make sure they satisfy the auditors requests to ensure that the letter is positive.  But another big caveat here – the auditors are not making an assessment as to the validity of anything other than the application of accounting principles applied by the company.  This does not mean that all the information is exactly correct or that they are in total agreement with the application of the accounting principles – just that in their opinion, they were reasonably applied in the report.