Using Annual Reports

Q: What are the most important parts of an annual report to look at when deciding on buying stock in a company or keeping stock you already own?
–R. Brown, Birmingham, Alabama

A: The company annual report (also referred to as the 10-K report) can provide any number of clues to help you make the right investment decisions. You must, however, read very carefully and be able to draw conclusions from the information provided. Here are some sections to focus on:

  • Business profile. This section covers the type of business, the prospects for the industry the firm is in, and its competitors. It’s important that you understand how the company makes money. If you don’t understand how the company makes money, look elsewhere.
  • Financial and operating data. This section includes the balance sheet, income statement, and cash flow statistics. Ideally, over several years, revenues should be increasing or losses should be shrinking.
  • Management’s discussion and analysis. This section details the company’s performance over the last two years. You must determine if management’s interpretation of how its strategies worked is accurate and will lead to future growth.
  • Pending litigation or contingencies. This section details any lawsuits or other circumstances that could threaten the assumptions about the financial growth or future prospects for the company. You’ll have to determine how seriously these issues place the future of the company at risk.

You can get an annual report from the Websites of most companies, or by calling, or going to the Public Register’s Annual Report Service at www.prars.com.

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