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The Primary Reason the Annual Report Is Important in Finance

Original post by Cynthia Gomez of Demand Media

Annual reports tell shareholders how a company they're invested in is doing.

Publicly traded companies are required to issue annual reports that tell shareholders how the company is doing financially. These often lengthy documents contain different financial documents as well as graphs and charts that provide a visual overview of the company's fiscal health and operations. For shareholders, it's a way to get more in-depth information on their investment.

Contents

Components of an Annual Report

At the beginning of any annual report are a letter to the company's shareholders, along with financial highlights that include graphics and sometimes photos. Following that is a discussion and analysis of how the company did during the year by executives. Financial statements, such as the balance sheet and income statement, an auditor's report, a summary of financial data and other corporate information finish up the annual report.

Fiscal Picture

With all the information in an annual report, shareholders can get a clear picture as to how the company is performing. They can see how profitable the company is by viewing its total assets and liabilities, which are included in the balance sheet. For instance, if debt is increasing while revenue is remaining steady, the company's financial health may be in decline. On the other hand, if debts are decreasing while revenue is growing, the company may have a promising future ahead.

Managerial Strategy

The annual report tells shareholders what the company's strategy is for increasing revenue in the coming year. This is usually outlined in the letter to shareholders. It's meant to give shareholders an idea of what direction the company is going in, such as expanding in domestic or foreign markets, or launching new products.

Decision Making

The goal of the annual report to show shareholders that they are worth continuing to invest in. For shareholders, the financial report is a vital decision-making tool, allowing them to determine whether their investment is providing a good return, or whether their dollars would be better invested elsewhere.


                   

References

About the Author

Cynthia Gomez has been writing and editing professionally for more than a decade. She is currently an editor at a major publishing company, where she works on various trade journals. She also spent many years working as a newspaper reporter. She holds a bachelor's degree in journalism from Northeastern University.

Photo Credits

  • Comstock/Comstock/Getty Images


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