What Items Should an Analyst Review in an Annual Report?
Original post by Geri Terzo of Demand Media
An annual report, which may also be referred to as a 10-K regulatory filing, contains key financial details that analysts use to issue reports and make performance forecasts. Investors often rely on the analysis for some direction on a company's profit potential. The annual report can be complex and typically includes both financial statements and insight directly from corporate executives. Analysts should review both components with a particular focus on certain items.
Financial analysts often draw comparisons between current financial results and past performance, and make predictions for future activity. According to the For Dummies website, analysis requires the comparison of results between the most recent annual report and year-ago results. A company's management team typically outlines goals and expectations for the future in an annual report, and an analyst can begin to form an analysis based on any plans that may have been met, missed or exceeded.
Companies can legally report profits in a number of ways, some of which allow for more creative accounting than others. The earnings estimates that analysts form are affected by the accounting method through which companies decide to report profits, according to a report published by the University of Michigan. Financial analysts might update an earnings forecast based on the content, either statistical or expressed in written form by corporate executives, in an annual report. The more complex the detail in an annual report, however, the more time it is likely to take an analyst to formulate an opinion.
An analyst should review the amount of cash flow generated during the period. A cash flow statement is included in an annual report, and an analyst can use the information on this document to determine if a company's growth plans are reasonable in light of income. A company can earn cash through operations or by raising capital in the financial markets. Ideally, a company's cash from operations will fund future initiatives but many businesses turn to equity or debt financing for growth activities, according to the Accounting Base website.
Although it is the job of a financial analyst to assess a business based in part on information provided in an annual report, the analyst's ability to perform this function successfully could be limited based on a company's disclosure. An analyst's ability to issue financial projections for a business is tied directly to the amount of detail that a company chooses to disclose in an annual report, according to a report published by Spain's University of Valencia.
- University of Valencia: The Influence of Corporate Governance Mechanisms on Analyst Forecast Accuracy
- For Dummies; Six Things in an Annual Report Necessary for Fundamental Analysis; Matt Krantz
- AccountingBase: The Cash Flow Statement
- University of Michigan; The Effect Of Annual Report Readability..."; Reuven Lehavy, et al; 2009
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.