How to read an annual report

This tutorial provides a quick overview of how to read an annual report. The speaker, a Finance Storyteller, shares their personal approach and acknowledges that the tutorial is not comprehensive. They encourage viewers to share their own experiences with reading annual reports.

Before reading an annual report, it is important to define your guiding question. Are you a current or prospective investor evaluating investment opportunities? An employee or applicant seeking insights into the company's performance and direction? Or a student analyzing the report for academic purposes?

When deciding which version of the annual report to use, consider your preferences and needs. The online interactive version offers videos and easy navigation for a more engaging experience. If you prefer a visually appealing format, go for the full-color download version. For official filings, refer to form 10-K filed with Securities and Exchange Commission (SEC). Alternatively, if you like taking notes and marking important sections physically, opt for the hardcopy printed version.

To effectively research an annual report, it is recommended to set a time limit of one hour. Annual reports can be lengthy, ranging from 70 to 300 pages. By allocating a specific timeframe, you can delve into the depth and complexity without getting stuck in trivial details.

Importance of Narrative and Numbers "Narrative vs numbers" in the annual report emphasizes the need to allocate sufficient time for both aspects. The CEO's "letter to the shareholders" provides valuable insights into the company's vision, strategy, and execution. Additionally, reviewing business risks helps identify potential adverse impacts on the company.

Exploring Narrative Sections "Letter to shareholders" offers crucial information about company vision and strategy. Understanding business risks is essential for risk assessment.

Analyzing Financial Data The financial summary presents key performance indicators through graphs and tables. Analyzing income statement, cash flow statement, and balance sheet enables comprehensive evaluation.

In income statement analysis, we evaluate the financial results of a company. We start by conducting a vertical scan of the income statement to examine key numbers such as revenue, operating income, and net income. We analyze these figures in absolute terms and also assess their relative proportions: operating income as a percentage of revenue and net income as a percentage of revenue. Additionally, we identify the major cost categories mentioned in the statement. Next, we perform a horizontal scan to compare this year's performance with previous years' data for growth or decline percentages.

The cash flow statement provides valuable insights into a company's financial health. It starts with the main equation: the starting and ending cash balance of the year, along with cash inflows and outflows that influenced it. By conducting vertical and horizontal scans, we can identify significant line items and analyze year-over-year changes.

When analyzing a balance sheet, focus on the company's assets and liabilities. Determine where the company's assets are concentrated: financial assets, fixed assets, or intangible assets. Also consider how the company is financed: whether they have a lot of debt.

Understanding the Balance Sheet The balance sheet is primarily made up of equity. This provides a snapshot of the company's financial position at a specific point in time.

"Peeling the Onion" with Annual Reports "Peeling the onion" refers to digging deeper into annual reports layer by layer. To uncover valuable information, it is important to investigate line items in income statements, cash flow statements, and balance sheets. Understanding key terminology is crucial for making sense of complex financial data.

Companies may have different fiscal year periods, which do not always align with the calendar year. For example, Microsoft's fiscal year runs from July through June, Apple's from October through September, and Walmart's from February through January. It is important to check the dates when analyzing financial reports.