Table of contents
Introduction
Understanding the financial condition of a company before investing in it is extremely important for investors. It allows them to decide on whether to invest in the company or not. To make this decision effectively, investors must learn to read the annual report of a company as it provides complete financial information and growth possibilities.
However, before learning how to read company annual report, you must learn what a company annual report is. This article will have a detailed discussion of the annual report, the things that a company annual report comprises, and the elements that you must look for in a company annual report.
What is annual report of a company?
A common question that arises in the minds of investors is what is annual report of a company. An annual report is a record of the functions and financial condition of a company which is published every year by the company itself. The annual report is sent to the shareholders and stakeholders of the company.
An annual report plays a vital role in gaining the attention of shareholders and potential investors as it communicates the true condition of the company.
A large number of investors make their decision to invest in a company through the annual report of the company. Therefore, the facts provided in the annual report should be legitimate and official. In order to know more you can see an annual report of a company example.
Components of a company annual report
An annual report of a company comprises crucial data. The list of components that are included in an annual report is given below.
1. Letters to shareholders
Letters to shareholders can be termed as documents sent by the President or a higher-positioned executive such as the CEO of the company to shareholders. These letters furnish the shareholders with information about the operations of the company and how well the company has performed in the last year.
2. Audited financial statements
The audited financial statements of the annual report contain balance sheets, equity statements, income statements, and cash flow statements. The audited financial statements present the financial performance of the company in the last year.
3. Auditor’s report
The auditor’s report indicates that the annual report has been created by following the required rules and regulations.
4. Accounting policies
Accounting policies must be included in an annual report as they define the procedures and rules the company has followed to prepare the annual report and financial statements.
5. Summarised financial information
An annual report contains a summary of the financial information that has been presented in the annual report of the company. Summarised financial information allows investors to understand the report easily and quickly.
6. Management Discussion and Analysis(MD&A)
A management discussion and analysis (MD&A) is essential to a company’s annual report. It can be considered as a written depiction of the future goals, financial conditions, and outcomes of the activities of the company from the viewpoint of the management.
What to look for in a company annual report?
Although a company annual report consists of various components, your primary focus should be on some specific ones. The things that you are required to look for in a company annual report are provided below.
1. Balance Sheet
A balance sheet is a financial statement that furnishes the reader with the financial condition of a company at a specific point in time. It presents the assets, liabilities, and owner’s equity of that company.
Assets are the resources owned by the company that are anticipated to benefit the company in the future. On the other hand, liabilities are obligations or debts that need to be settled in the future.
2. Income Statement
An income statement is also one of the financial statements in an annual report. It delivers the earnings and expenses of a company in a specific period. It helps you determine the financial performance of the company.
You can create an income statement of the actions performed in a particular period for your company by using trial balances from any two points in time.
3. Cash Flow Statement
A cash flow statement is a type of financial statement that deals with the cash of the company. A cash flow statement helps you understand the financial management system of the company.
The cash inflow and cash outflow of the business in an accounting period are shown in a cash flow statement. It provides a detailed description of the areas from which the company has received cash and in which it has used the cash.
Conclusion
Reading a company’s annual report accurately is vital for making an investment decision. If you are an investor who wants to invest in a company, reading the annual report can help you make the right decision. If you want to understand trading and investing, read blogs on StockGro.
FAQs
An annual report is highly beneficial for a company as it helps the company evaluate the mistakes made in the previous year and what changes can be made to increase profits. An annual report can also help the company review its operations and make the required modifications to the business structure.
An annual report is also beneficial for investors and shareholders as it helps them identify the company’s financial health easily. It tells them whether the company can pay bills, generate revenue, and clear debts in the future.
To analyse the annual report of a company, you must first confirm that all the essential components of an annual report are present in the report. Later, you must analyze the financial statements of the annual report such as the income statement, the cash flow statement and the balance sheet. These three documents can help you accurately measure the financial soundness of the company.
To make an annual report of a company good and appealing to investors, you must set a theme for the report. Divide your annual report into different sections and add dedicated pictures and visuals for each section. You should also add some charts and graphs to your annual report so that the reader can easily understand the report.
The format of an annual report varies from company to company. However, the common format of an annual report consists of a cover page, table of contents, notes from a prominent figure in the company, executive summary, financial synopsis, project overview, and future goals.