An annual report is the best way for the company to express itself before investors. Many investors fail in reading annual report effectively. An annual report presents the company in best way. One must learn how to read between the lines to find out the actual condition of the company.

Annual Report Versus 10-K Filing

A company files both annual report and 10-K report to the SEC (Securities and Exchange Commission). An annual report consists of a letter from CEO, and an overview of financials written on nice glossy pages.

The 10-K is a document without colored pictures. It is submitted to the SEC.  Sometimes, companies file only 10-K report as its annual report which does not attract reader towards itself. Some companies merge both annual report and 10-K document into a single document.

The Components Of An Annual Filing

To practically invest in a company, one must examine and read the 10-K file. The 10-Ks include detailed description of the business, risk factors, and financial notes. The most important components of an annual report are following items:

1.       Item 1: Business- A brief description of company’s operation

2.       Item 1A: Risk Factors

3.       Item 3: Legal Proceedings

4.       Item 6: Selected Financial Data

5.       Item 7: Management’s Discussion and Analysis of Financial condition

How To Tackle

Different people read annual reports in different ways. Some investors start reading from end to beginning. Way of reading does not make any difference. The thing matters how much one absorbs the important points of business and their financial condition. A good way to tackle the annual report is to start reading from the business description. One must know what the company does. Then one can determine either he/she must go further or not.

When one gets satisfied with the company’s business, then he/she must analyze the financial data. Analyzing financial data means to determine how the company performed in last few years, is the balance sheet of company strong or weak. And one must also compare the income statement with cash flow statement. If one gets satisfied, then he/she must move on.

Now, one should go back to read risk factors and legal proceedings. Risk factors include risks like “Our industry is highly fragmented with lots of competitors.” These are main risks which need to be considered. Also focus on unusual risk factors. The Legal Proceeding section warns one about important court cases.

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