Many investors know that they are supposed to request a company’s annual report to understand the business but they don’t really know what it is or why it is important.
What is the annual report?
The annual report is a document prepared by a company’s management to the shareholders explaining what happened in the business for the year. There are no real rules for what an annual report contains. Some companies don’t even prepare one.
How is the annual report different from the 10K? Do I need to read both?
If the 10K is regular Coca-Cola, the annual report is Diet Coke. It is a softer, more accessible, easier-to-understand version of the company’s finances, business, and management philosophy. The 10K is often hundreds of pages of text, financial statements, and legal disclosures. The annual report, on the other hand, is sort of a PR document with lots of pictures, colorful graphs, and images of smiling employees.
Some companies don’t prepare an annual report at all, instead releasing everything in the 10K. Others combine a short annual report with the 10K. Still others have a very, very lengthy annual report and their 10K statement consists of nothing but the saying, “incorporated by reference from the company’s annual report.”
The bottom line is that you need to read both the 10K and annual report to get a full understanding of a company. You wouldn’t buy a car without knowing the background of the company that made the automobile and due to the power of compounding, there is much more at stake when you choose a stock to buy.
