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What to Look For in The Annual Report of a Company

Annual reports are essentially documents on the company’s performance for the year aimed at potential investors. If you are considering investing in a particular company or certain business area then the annual report offers a snapshot of each company and its business performance. This is not to be confused with the 10-K report that is mandatory for any company to file. Most treat the annual report like the 10-K and submit
the more detailed 10-K in place of the annual report. Keep in mind that an annual report is essentially marketing material so make sure to look beyond what you see.

General overview:
The first section is usually an excellent introduction to the business and what it does. Here, a company should lay out what they do in the simplest terms. If a customer cannot get any clarity from this section then they should move on to another report.

Finances: Once you get a concise look at the overall profile, delve into the finances. It may seem daunting but this is where the clearest picture lies. Focus on the gross and profit margins, even compare these numbers from previous yearly reports to find changes. Have they increased or decreased? Has top management being handing itself big pay-checks while the company does not break-even? Make sure to check if the policies have changed recently as this will affect how positive the numbers look. It also lets you have an idea of where it stands in the current financial market and if it looks promising enough for you to invest in.

This section is key to public market investors, you the outside investor. It should ideally give you insight into where the company stands in the share market and how this will affect you if you purchase equity shares. These are the components of a company you will invest in and the report will indicate how the shares have performed and how they have been distributed. You can watch the rise and fall of several of these in the public arena – the national stock exchange.

Peruse this section carefully as it will indicate if the company has any legal woes or if there is any potential conflict on the horizon. Does the company on-going cases and if so are they significant enough to affect the desirability of the company?
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