Reading Annual Reports

It's the time of year again, where companies with financial years ending on 31 Dec have sent out or are in the process of sending out their annual reports (Wooo......) Is it important to read through the annual reports? Yes, of course it is. Here are some of the reasons why and things to look out for when looking through the annual report of the company

(Image source: pixabay.com, PeteLinforth)

Checking on the health of the company

The financial statements in the annual report can give a broad overview of how the company did that year and its current position. Looking at the debt levels, the account payables and receivables can help to give you a better idea of how the company has done in the previous year and whether it has met your expectations for it as well as whether it is in a position to continue to do well in the future.

Look at the prospects of the company

The front part of the annual report will usually have a chairman's message as well as a summary of the company's performance in the past year as well as prospects. This is a good way to get information from the horse's mouth. Some of the information may have to be taken with a pinch of salt (they may oversell their future prospects to encourage more investment in their shares), but it is generally a good place to get some insight on the industry that the company is operating in as well

Notes to the financial statements

This is one of the most time consuming parts as there are just so many notes, but there are some hidden gems of information inside here that can be discovered by the diligent investor. You can look at the sources of the company's revenue, its debt structure along with some other company, breakdown of profit and loss into the different divisions in the company along with some other company specific information that will shed more light into the future prospects of the company and the factors that are likely to affect it in the future. Some of these little details do not come with quarterly reports so take the chance to look through them.

Summary

There are a lot of things that you can learn about the company by looking at its annual report. It would also be good to read previous years ones as well to see the development of the company as time progresses and to get a good idea of the quality of management of the company as well as its moats.

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