Most retail investors skip reading annual reports, but that’s a mistake.
“An annual report is like reading your medical exam results. It has its own jargon, but it tells you the condition of a company,” Josefino Gomez, a Registered Financial Planner, told FinancialAdviser.ph
If you want to make smarter investment decisions, learning to analyze annual reports is a must. The good news? It takes less than an hour to spot the key insights you need.
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What an Annual Report Tells You
An annual report provides a yearly snapshot of a company’s performance. It helps investors understand:
What the company sells or does
How it makes money
Whether it’s profitable—or struggling
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Start With the Business Overview
Before diving into numbers, read the business overview and development section. If the company’s business model is confusing or uninteresting, move on.
“This practice saves time and effort in finding your next potential winning stock,” says Gomez.
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CEO and Chairman Messages—What They Reveal
These sections summarize how the company performed and its future expectations. But don’t take management’s words at face value—cross-check their claims with the numbers.
The Management Discussion and Analysis (MD&A) is also key. It explains major financial changes and reasons behind them.
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Key Financial Statements to Review
Balance Sheet: Shows a company’s assets, liabilities, and shareholder equity.
Too much cash? The company may not be investing efficiently.
High debt? It could signal future liquidity problems.
Income Statement: Tells you how much money the company made.
Rising sales but shrinking margins? It may be lowering prices to boost revenue.
Cash Flow Statement: Shows where the company’s money comes from and where it goes.
Operating cash flow should be positive for a healthy business.
Investing cash flow reveals whether the company is expanding or selling assets.
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Use Ratios to Compare Performance
P/E Ratio (Price-to-Earnings): Compares stock price to earnings.
P/BV (Price-to-Book Value): A ratio below 1 means the stock is selling for less than its recorded net worth.
ROA (Return on Assets): Measures how well a company turns its assets into profits.
The Bottom Line
Reading annual reports helps investors spot red flags, assess growth potential, and understand management’s track record.
“An annual report mostly tells us about the past. But you can use that information to forecast the future,” Gomez explains.
It might be overwhelming at first, but the more you read, the better you’ll get.
