Reading Annual & Quarterly Reports

Introduction

In the following section, we will look at the information available in corporate reports. We will cover the following topics:

• What Is an Annual Report and Why Is It Useful to Investors?
• Required Information
• How to Obtain Annual Reports
• Quarterly and Other Financial Reports

What Is an Annual Report and Why Is it Useful to Investors?

A company is required by law to provide its shareholders with information about its operations. An annual report satisfies this obligation.

The information in an annual report shows the company finances. It is extremely useful to investors because it allows them to use their own judgment on how well the company is doing and forecast its future earnings and dividends. For an investor, this information is critical for making investment decisions.

You can also read the chairman's letter about the company's future goals. Use caution with these letters since the author is a company representative. You may want to look at how accurate this letter has been in the past to give you an idea how much you can trust it.

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Required Information

An annual report is a brief profile on the health of a company. Here is what comprises an annual report:

• A letter from the chairman on the high points of business in the past year with predictions for the next year.
• The company's philosophy: a section that describes how the company does business.
• An extensive report on each section of operations in the company. This portion of the report may describe the services or the products that the business offers.
• Financial information that includes the profit and loss (P&L) statements and a balance sheet. The P&L statement describes income and expenses and gives the net profit for the year. The balance sheet describes assets and liabilities and compares them to the previous year. In this section, important information may be revealed in the footnotes. They may discuss current or pending lawsuits or government regulations that have an impact on company operations.
• An auditors' letter confirming that all of the information provided in the report is accurate and has been certified by independent accountants.

Keep in mind that the public relations department of the company produces the annual report. The report should be very accurate with all the information described in the best possible manner.

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How to Obtain Annual Reports

Annual reports are mailed automatically to all shareholders of record. To obtain the annual report for a company in which you do not own shares, call the public relations (or shareholder relations) department of the company. You may also look on the company website, or search the Internet. There are several sources on the Internet providing information on public companies. You can search the EDGAR database at www.sec.gov/edgar.shtml, the Microsoft Investor website at www.investor.msn.com, or the Yahoo Financial website at finance.yahoo.com, to name a few. Simply keying in the stock's symbol will provide you with the needed information.

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Quarterly and Other Financial Reports

Besides the annual report, companies provide several other financial reports such as a quarterly report, 10k reports and statistical supplements.

Quarterly reports are very similar to the annual reports except they are issued every three months and are less comprehensive. They may be obtained in the same way as an annual report.

Larger firms issue 10k reports that are more detailed than annual reports. A 10k report provides detailed information about divisions and subdivision of the company. These reports are sent to stockholders only by request. One should contact the company's corporate secretary to receive a 10k. All 10k filings are available on the EDGAR database at www.sec.gov/edgar.shtml.

Statistical supplements are reports of larger corporations as well. They provide financial information, such as statement data and key ratios, which can be dated back 10 to 20 years. These reports are also posted on the EDGAR database (www.sec.gov/edgar.shtml).

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Understanding Company Earnings