What to Learn from a Annual Financial Report

When looking to invest in any company whether directly or by buying stocks, looking at an annual financial report will give you all the information you need to understand the company's short-term and possibly long-term value and trajectory. Now, I'm no accountant and so looking at an annual financial report used to be just like trying to read a book in a foreign language. And while I'm still not an expert by any means, I've developed a shorthand for understanding and reading an annual financial report so I can make the best decisions with my investment capital. When you look at an annual financial report, you want to understand three parts of it. These three parts of an annual financial report are the income statement, the balance sheet and the cash flow statement.

The first part of an annual financial report to consider is the income statement. This might also be called an earnings statement or, less frequently, a statement of operations. This portion of an annual financial report will detail how it is that a company is making money. It will include all itemized monies coming in, whether through sales or asset appreciation. Be careful, though with how a company might valuate some of its assets. Many times, a company doesn't really provide a truly fair market value for their assets. Double check their valuations against what similiar assets are trading for in the open market to get an even more accurate assessment of their assets.

The next part of an annual financial report to understand is the balance sheet. Predictably, the balance sheet will help you understand how a company balances with what it owns and what it owes, or, in other words, what it makes and what it spends. This is helpful to see the equity that the company has built up.

Finally, you want to understand the cash flow statement of an annual financial report. This document will help you understand how the company is paying its growth and operations. A company with a positive cash flow is using incoming cash to cover operations rather than credit and could be poised for substantial growth.

An annual financial report can be a confusing and intimidating document, but if you understand how to read it, it will help you uncover some truths about a company before you decide to invest in them.