Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Annual Report ====== An Annual Report (often filed in the US as a [[Form 10-K]]) is a comprehensive, yearly publication that a public company is required to share with its [[shareholders]]. Think of it as the company's annual report card. It’s a detailed narrative from the company’s management that reviews the past year's performance and financial results, discusses its key business segments, and provides an outlook on its future. More than just a legal requirement, it's a primary communication channel between a company and its owners. For the diligent investor, the annual report is an absolute treasure trove of information, offering a direct, unfiltered look into the heart of a business. It contains the "big three" financial statements—the Income Statement, Balance Sheet, and Cash Flow Statement—along with a letter from the [[CEO]], detailed notes, and management’s own analysis of the results. It's the raw material from which a true understanding of a company's health and prospects is built. ===== Why Should a Value Investor Care? ===== In a world saturated with analyst ratings, news headlines, and market noise, the annual report is your direct line to the source. It is the single most important document for any serious practitioner of [[value investing]]. The legendary investor [[Warren Buffett]] has famously said that he and his partner [[Charlie Munger]] "enjoy the process of reading annual reports" and that their advantage comes from "concentrating on the companies that we are able to understand." Why the enthusiasm? Because the annual report allows you to: * **Be Your Own Analyst:** You get the raw data, not someone else's interpretation. This allows you to form your own independent conclusions about a company’s [[intrinsic value]]. * **Understand the Business:** It forces you to learn about how the company actually makes money, who its competitors are, and what risks it faces. * **Judge Management's Candor:** The tone and content of the report, especially the CEO's letter, reveal a lot about the character and competence of the people running the show. Are they transparent and honest about their failures, or do they only trumpet their successes? ===== A Treasure Hunter's Guide to the Annual Report ===== Reading an annual report can feel like a daunting task, but it becomes manageable when you know what you're looking for. Think of it as a guided tour of the company. Here are the key stops: ==== The Chairman's/CEO's Letter ==== This is the opening act. It's a personal message from the top brass to the shareholders. While often full of corporate-speak, a good letter provides a candid overview of the year's triumphs and tribulations. Look for a [[Chairman]] or CEO who writes clearly, admits mistakes, and outlines a coherent strategy for the future. A great letter helps you understand the leader's philosophy and vision for the business. A bad one is full of jargon and blames external factors for every problem. ==== The Financial Statements ==== This is the heart of the report—the hard numbers. There are three key statements, and they work together to paint a complete picture of the company's financial health. === The [[Income Statement]] === Also known as the Profit & Loss (P&L) statement, this tells you how profitable the company was over a specific period (usually a quarter or a year). It starts with [[Revenue]] (or sales) at the top and subtracts various costs and expenses, such as the [[Cost of Goods Sold (COGS)]], to arrive at the famous "bottom line": [[Net Income]]. It answers the question: **Did the company make money?** === The [[Balance Sheet]] === This provides a snapshot of the company's financial position at a single point in time. It's governed by the fundamental accounting equation: [[Assets]] = [[Liabilities]] + [[Shareholders' Equity]]. In simple terms, it shows what a company owns (assets) and what it owes (liabilities). The difference is the equity belonging to the owners. It answers the question: **What is the company's net worth?** === The [[Cash Flow Statement]] === Perhaps the most crucial statement for a value investor. While earnings can be manipulated through accounting assumptions, cash is king. This statement tracks the actual cash moving in and out of the company, broken down into three activities: * **Operating Activities:** Cash generated from the company's core business operations. * **Investing Activities:** Cash used for investments, like buying equipment or other companies. * **Financing Activities:** Cash from activities like issuing debt, paying dividends, or buying back stock. This statement answers the question: **Where did the cash come from, and where did it go?** It's essential for calculating metrics like [[Free Cash Flow (FCF)]]. ==== Notes to the Financial Statements (The Fine Print) ==== This is where the secrets are buried! The notes are an integral part of the financial statements and provide critical details that clarify and expand upon the numbers. You can find information on accounting methods, debt schedules, pension fund status, lawsuits, and segment performance. Ignoring the notes is like buying a house without inspecting the foundation. ==== Management's Discussion and Analysis (MD&A) ==== In this section, management provides its own commentary on the financial results. It's their chance to explain //why// the numbers look the way they do. This can be incredibly insightful for understanding business trends, competitive challenges, and future opportunities. However, read it with a healthy dose of skepticism, as it's also management's opportunity to put a positive spin on things. ===== Practical Tips for Reading an Annual Report ===== * **Start with What You Know:** Pick a company whose products or services you understand. It makes connecting the numbers to the real-world business much easier. * **Read It Backwards:** A great pro-tip is to read the report in reverse. Start with the notes and financial statements to form an unbiased opinion based on the numbers. Then read the [[Management's Discussion and Analysis (MD&A)]] and the CEO's letter. This prevents management's narrative from coloring your analysis. * **Look for Trends:** Don't just read one year's report. Download the last 5 or 10 reports and compare them. Are revenues growing? Are margins improving? Is debt piling up? The trend is often more important than a single year's result. * **Focus on the Business:** Ignore the glossy photos and fancy graphic design. The quality of the paper doesn't reflect the quality of the business. Focus on the words and numbers.