F. Annual Reports
To get an idea of a company's financial health, review its annual report.
The report contains detailed information about the company's financial condition and management policies, and can help investors decide whether to buy or sell a stock and how to vote at the annual shareholders' meeting.
Each NYSE-listed company is required to send an annual report to all its shareholders. Current annual reports are easily obtained. Just contact the company and request one. Also, many companies post their most recent annual report on their website in a format suitable for downloading and printing.
Most annual reports include:
- Balance sheet;
- Statement of income and retained earnings;
- Statement of changes in financial position; and
- Accountant's report
The balance sheet is a summary of a company's assets and liabilities. It offers a snapshot of the company's financial health at a specific point in time. Data from the end of the current year is compared to the same data from the previous year so that investors can note changes and attempt to analyze the company's performance.
Balance sheets are comprised of three sections: Assets, liabilities and stockholders' equity. The assets side of the ledger must equal or “balance” the liabilities section plus the shareholder's equity section.
The first section lists all the company's assets, or resources. For example, a company that makes cellular phones might list as its assets cash, accounts receivable (money other companies owe it), inventories (all the finished cell phones, plus all the supplies used to make the phones such as plastic and electronic parts), the cell phone factory itself, the land the factory is built on, and the machines in the factory.
The second section lists liabilities, or debts. The same cell phone company might list as liabilities its accounts payable (money it owes for cell phone supplies and other services), unpaid wages, outstanding loans, taxes, and the dividends it will pay to shareholders. The liabilities section also includes shareholders' equity, the value of all the stock owned by shareholders. This section lists the value of the company's preferred and common stock, the money made from selling stock, and the profits that have been reinvested in the company.
- Stockholders' equity
The third section lists stockholders' equity, which is also called the net worth of a company. It is not a tangible amount of money stored in a bank, but the value of all the shareholder investment in the company.
Statement of Income and Retained Earnings
If the balance sheet is a snapshot of the company's finances at a single moment, the income statement is more like a movie. It links together several balance sheets and shows the company's financial performance over the period of a month, a quarter, or even several years.
The income statement tallies up all income, subtracts expenses, and shows how much money is left to reinvest in the company. It compares that number over a period of time. The desirable trend is when a company is taking in more money than it is spending and is investing in growth.
Statement of Changes in Financial Position
This statement deals with working capital - money used on daily operations of the company. The statement, which may compare several years, shows how much working capital was available, and how it was spent.
Every annual report includes a report from an independent accountant. The accountant's report usually says that the annual report is a truthful reflection of the company's finances and that it was compiled in compliance with normal auditing standards and accounting practices.
The accountant will note if the annual report fails to meet one of these standards.