Most of the companies are interested in providing its existing and potential investors with actual information on its performance and financial position. This is commonly being done through a complex report on firm’s activities and financial condition over the year, called annual report. Usually, it is being issued to company’s stockholders and creditors after the end of a fiscal year. Different regulatory organizations also are the users of the annual report analysis.
Typically company’s annual report consists of the introduction section, balance sheet, profit and loss report, cash flow statement and notes to the financial statements. Sometimes it also includes some other components, such as chairperson’s statement, director’s report or auditor's report.
Balance sheet is the first of three company’s primary statements. It is a summary statement of company’s assets, liabilities and stockholder’s equity. Also being referred as the statement of financial position, it is a fundament for performing the analysis of company’s liquidity, financial sustainability and other indicators.
- Liquidity Ratio Analysis. Being performed to measure firm’s short-term debt-paying ability in order to detect, if the company would be able meeting its obligations to short-term creditors.
- Financial Sustainability Analysis. It is applied to detect firm’s long-term paying ability and measure risks of its bankruptcy, caused by the inability to carry its debt.
Income statement (profit and loss report, statement of operations) is a component of company’s annual report, reflecting information about its revenues and expenses. The objective is to take the net sales of a company and by excluding various kinds of expenses and taxes to reflect the net income (or net loss) of a company. This statement can also be used for numerous ratios calculation and for performing different kinds of analysis, including the financial sustainability analysis, profitability analysis, etc.
- Profitability Analysis. Being applied to measure firm’s ability to earn profit, which is important, because it is a source of revenue for the stockholders, and also the source for covering the debts. Being profitable is a key objective for a business.
Some kinds of analysis combine usage of the information from different firm’s statements to receive a deeper understanding of its performance and position.
- Activity Ratio Analysis. This kind of analysis is needed to evaluate, how efficiently company manages its resources, including calculation of turnover of different kinds of assets, such as cash or accounts receivable.
Another primary statement of an enterprise is the statement of cash flows. Since cash is being one of the most important and liquid assets, all the managers, shareholders and analysts are interested in closely following firm’s cash balances. This statement reports all transactions that affect the cash flow of an enterprise, including the most liquid assets. All the inflows and outflows are being separated into different groups, which relate to operating activities, investing activities and financing activities.
- Cash Flow Ratio Analysis. Cash flow statement is also a basis for different ratios calculation. For a long time analysts used mainly the information from the balance sheet and income statement for the financial ratios calculation, but during few last decades the statement of cash flow has become an object of their close attention too. Most of the financial ratios, based on the cash flow statement information, detect the ability of the operating cash flow to cover company’s debt, cash dividends, etc. Most commonly calculated are operating cash flow to total debt, operating cash flow per share, operating cash flow to cash dividends ratios.
Annual report analysis can provide its user with a complete vision of company’s performance and position. By analyzing different components of firm’s annual report one can make conclusions on its liquidity, financial sustainability, debt-paying ability and other characteristics.