Evaluating annual reports

How to separate fact from fluff

information about company operations? Do the photos and charts supplement the written report, or are they extraneous?

Janke says annual reports are much more forthright today than they were a decade ago, especially in providing complete financial information. The financial statements should examine the company’s assets and liabilities, stockholders’ equity, long-term debt, net earnings and net revenues. “Basically we look for fundamental information about earnings and pretax profit margins and a compounded growth rate,” he adds.

Investors should review a company’s annual report each year to assess the company’s progress, especially as it relates to revenues and earnings per share. For example, find out if a given company’s earnings represent a percentage of investment capital.

However, don’t use the annual report as the only barometer on which to base investment decisions. Use advisory services and read analysts’ reports in such publications as Value Line and Standard & Poor’s The Outlook. For the most part, the annual report gives the investor a feel for the company’s management. It’s essentially
his or her chance to see what’s on the mind of the CFO or CEO.

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