Reading Annual Reports

You should look further than using a data file to analyze a potential investment. Understanding an annual report for a company provides valuable insight to the potential investment The June 1994 Issue of "Better Investing" magazine, page 26 included an article about reading and understanding company annual reports.

The basics included in the article included:

  1. Start with the notes and read from back to front since the front is management fluff.
  2. Look for litigation that could obliterate equity, a pension plan in sad shape, or accounting changes that inflated earnings.
  3. Use it to evaluate management.
  4. Look for notes to offer relevant details; not "selected" and "certain" assets. Revenue and operating profits of operating divisions, geographical divisions, etc.
  5. How the company keeps its books, especially as compared to other companies in its industry.
  6. Inventory. Did it go down because of a different accounting method?
  7. What assets does the company own and what assets are leased?