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HOW TO QUICKLY & EFFECTIVELY READ AN ANNUAL

REPORT

04 JUN 2020

Tim Stobierski Contributors

Business Essentials, Finance, Financial Accounting

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Intelligent investing requires analyzing a vast amount of information about a company to determine its
financial health. Armed with this information, an investor can better understand how much risk might be
involved with backing a company based on how well it’s performed historically, in recent quarters, and
toward its financial targets.

Exactly where this information comes from depends on the specific company that’s being invested in,
but typically requires several financial statements, including a balance sheet, cash flow statement, and
income statement.

In addition to these documents, most investors look forward to reviewing a company’s annual report—a
collection of financial information and analysis that can prove invaluable in evaluating the health of a
company.

If you’re not an investor, but an employee working within a corporation, the annual report can impart
valuable information pertinent to your career. Understanding how your company is performing and the
impact your actions have had on its business objectives can help you advocate for a promotion or other
form of career advancement.

If you’re unfamiliar with what goes into an annual report, there’s some good news: You don’t need to be a
financial expert to get value out of the document or understand the messaging in it.

Here’s an overview of the different information you’ll find in an annual report and how you can put it to

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How to Quickly & Effectively Read an Annual Report | HBS Online https://online.hbs.edu/blog/post/how-to-read-an-annual-report
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WHAT IS AN ANNUAL REPORT?

An annual report is a publication that a public corporation is required by law to publish annually. It
describes the company’s operations and financial conditions so that current and potential shareholders
can make informed decisions about investing in it.

The annual report is often split into two sections, or halves.

The first section typically includes a narrative of the company’s performance over the previous year, as
well as forward-looking statements: Letters to shareholders from the chief executive officer, chief
financial officer, and other key figures, as well as graphics, photos, and charts.

The second section strips the narrative out of the picture and presents a variety of financial documents
and statements.

Unlike other pieces of financial data—and because they include editorial and storytelling—annual
reports are typically professionally designed and used as marketing collateral. Annual reports are sent to
shareholders every year before an annual shareholder meeting and election of the board of directors, and
often accessible to the public via the company’s website.

Annual Report vs. 10-K Report

Annual reports aren’t the only documents public companies are required to publish yearly. The US
Securities and Exchange Commission (SEC) requires public firms also to produce a 10-K report, which
informs investors of a business’s financial status before they buy or sell shares.

While there’s similar data in both an annual and 10-K report, the two documents are separate.

10-K reports are organized per SEC guidelines and include full descriptions of a company’s fiscal
activity, corporate agreements, risks, opportunities, current operations, executive compensation, and
market activity. You can also find detailed discussions of operations for the year, as well as a full
analysis of the industry and marketplace.

Because of this, 10-K reports are longer and denser than annual reports, and have strict filing
requirements—they must be filed with the SEC between 60 to 90 days after the end of a company’s
fiscal year.

If you need to review a 10-K report, you can find it on the SEC website.

WHAT INFORMATION IS CONTAINED IN AN ANNUAL REPORT?

An annual report typically consists of:

• Letters to shareholders: These documents provide a broad overview of the company’s activities and
performance over the course of the year, as well as a reflection on its general business environment.
An annual report usually includes a shareholder letter from the CEO or president, and may also
contain letters from other key figures, such as the CFO.
• Management’s discussion and analysis (MD&A): This is a detailed analysis of the company’s
performance, as conducted by its executives.
• Audited financial statements: These are financial documents that detail the company’s financial
performance. Commonly included statements include balance sheets, cash flow statements, income
statements, and equity statements.
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• A summary of financial data: This refers to any notes or discussions that are pertinent to the financial
statements listed above.
• Auditor’s report: This report describes whether the company has complied with generally accepted
accounting principles (GAAP) in preparing its financial statements.
• Accounting policies: This is an overview of the policies the company’s leadership team relied upon in
preparing the annual report and financial statements.

WHAT TO LOOK FOR IN AN ANNUAL REPORT

While all the information found in an annual report can be useful to potential investors, the financial
statements are particularly valuable, as they provide data that isn’t obscured by any sort of narrative or
opinion. Three of the most important financial statements you should evaluate are the balance sheet,
cash flow statement, and income statement.

The balance sheet shows a company’s assets, liabilities, and owners’ equity accounts as of a specific
date, illustrating its financial position and health.

The income statement shows a company’s revenue and expense accounts for a set period, allowing you
to gauge its financial performance. Using trial balances from any two points in time, a business can
create an income statement that tells the financial story of the activities for that period.

Cash flow statements provide a detailed picture of what happened to a business’s cash during an
accounting period. A cash flow statement shows the different areas in which a company used or received
cash, and reconciles the beginning and ending cash balances. Cash flows are important for valuing a
business and managing liquidity, and essential to understanding where actual cash is being generated
and used. The statement of cash flows gives more detail about the sources of cash inflows and the uses
of cash outflows.

These three documents can help you understand the financial health and status of a company, and
they’re all included in the annual report. When you read the annual report—including the editorial
information—you can gain a better understanding of the business as a whole.

An annual report can help you learn more details about what type of company you work for and how it
operates, including:

• Whether it’s able to pay debts as they come due

• Its profits and/or losses year over year
• If and how it’s grown over time
• What it requires to maintain or expand its business
• Operational expenses compared to generated revenues

All of these insights can help you excel in your role, be privy to conversations surrounding the future of
the company, and develop into an effective leader.

CRITICAL INFORMATION FOR INVESTORS AND EMPLOYEES ALIKE

Being able to analyze annual reports can help you gain a clearer picture of where a company sits within
its industry and the broader economy, illuminating opportunities and threats.

The best part about learning to read and understand financial information is that you don’t need to be a
certified accountant to do so. Start by analyzing financial documents over a set period. Then, when the
annual and 10-K reports are published, you can review and understand what leadership is saying about
the operational and financial health of your company.

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If you’re an investor, knowing how to read an annual report can give you more information from which to
base your decision on whether to invest in a company. If you’re an employee within an organization,
learning how to read and apply the information contained in an annual report can help you understand
your company’s goals and capabilities and, ultimately, further your career.

Do you want to take your career to the next level? Explore Financial Accounting and our other online
finance and accounting courses, which can teach you the key financial topics you need to understand
business performance and potential.

About the Author

Tim Stobierski is a marketing specialist and contributing writer for Harvard

Business School Online.

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