How To Critique an Annual Report

Critiquing an annual report is usually the job of an auditor--both an internal and a certified public accountant who will validate that the information contained in the annual report complies with generally accepted accounting principles. This is an important document for both big companies and small businesses. At the very least, an annual report should be able to share some information on the company's performance for the preceding year.

Even if you're not an accountant or auditor, it pays to know about the quality of annual reports. This can be particularly useful if you are an investor in a company, or if you are in the market to buy and sell shares of stock.

Check for completion. An annual report should have several parts, which include a foreword from a certified accountant that all figures have been checked and are in line with accounting principles. The annual report should also include a statement from the company's president, identifying key accomplishments. The report should also include a financial summary, and an operations and management review.

Evaluate the clarity and quality. An annual report should clearly present the key accomplishments of a company, in face of difficulties. The statements should be clear and unequivocal. Otherwise, it might be an indication that the company is sugar-coating its report to appear that the company is in good health.

The report should also contain consistent information. Its main purpose is to share facts with shareholders and the public. These should include the company's performance during the preceding year, and its plans and goals in the future.

Evaluate the figures. An annual report should usually contain key financial reports representing the company's performance. These include the Financial Statement, Balance Sheet and Cash Flow Statement. These will help you determine whether the claims being made by the annual report about the company's financial health are feasible.

Take note of the relationships between the different aspects of the balance sheet. These include assets, liabilities and equity. These should tell their own story of the company's performance. For example, the asset portion will include real property, cash, and other investments. The liabilities portion will include loans from banks, and possibly bonds that the company has issued to creditors. The equity portion, meanwhile, will include shareholder investment, other capital infused into the company by its owners or shareholders, and existing capital.

Note that the assets column should equal the liabilities plus equity column. The ratios will play a big part in determining whether a company is performing well. For example, if the liabilities are significantly larger than the equity, then the company might have been heavily borrowing. If the assets are mostly in non-liquid form, like real estate, then the company might face liquidity problems if it doesn't have enough cash to spend on operations.

You will also need to compare the year-on-year performance of the company, in terms of the figures. Has it improved since the previous year? Or has performance declined?

Evaluate the consistency. The annual report should highlight a key theme. You will need to determine whether the company has attained its theme in its activities throughout the previous year. This theme should be a major part of the vision, mission and goals that the company president's message should put forth.

An annual report tells a story about the company. It will be up to the reader to determine whether the claims are plausible.


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