The June 1994 Issue of "Better Investing" magazine, page 26 has a three-page article about reading and understanding company annual reports. I will paraphrase:
- Start with the notes and read from back to front since the front is management fluff.
- Look for litigation that could obliterate equity, a pension plan in sad shape, or accounting changes that inflated earnings.
- Use it to evaluate management. I only read the boring things of the companies I am holding for long term growth. If I am planning a quick in and out, such as buying depressed stocks like BBA, CML, CLE, etc.), I don't waste my time.
- Look for notes to offer relevant details; not "selected" and "certain" assets. Revenue and operating profits of operating divisions, geographical divisions, etc.
- How the company keeps its books, especially as compared to other companies in its industry.
- Inventory. Did it go down because of a different accounting method?
- What assets does the company own and what assets are leased?
The following list of resources may also help.
- John A. Tracy has written an an easy-to-read and informative book named How to Read a Financial Report (5th edn., Wiley, 1999). This book should give you a good start. You won't become a graduate student in finance by reading it, but it will certainly help you grasp the nuts and bolts of annual reports.
- IBM offers guides to financial statements and annual reports in the investor relations part of their web site:
http://www.ibm.com/investor/help/
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