How to Decipher an Annual Report

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I recently looked at the annual report for a company and felt a little intimidated reading through it. Any ideas that would help a new investor learn how to get the most out of reading an annual report?-- W.B.F. (via Stockpickr Answers)

For new investors, a company's annual report can seem anything but inviting. The numerous pages of cryptic numbers and graphs you'll encounter can make the investing world seem a bit out of reach. Believe it or not though, the annual report isn't some alien document. It's something that you can get a grasp of in no time.

For starters, what exactly is an annual report?

An annual report is a document that all public companies are required to file once per year. The annual report outlines how the company is doing financially, what their key businesses are, and what's in store for the future. All of this information makes annual reports a hugely useful tool for individual investors.

The term "annual report" is sometimes used interchangeably with 10-K. What's the difference? The 10-K is the legal document that public companies file every year with the SEC, whereas the "annual report" tends to be filled with less legalese and more glossy pictures.

Not all public companies issue a glossy annual report, but the ones that do usually include the 10-K as part of it. Just think of the actual annual report as the whole thing, and you should be all right.

How to Find Annual Reports

Annual reports are freely available online, either from the SEC's EDGAR Web site or from the company's investor relations section of their Web site. Many companies are also happy to mail you a free annual report if you just ask.

Another filing out there is the 10-Q, which is filed by public companies every quarter. You should look at the 10-Q much in the same way you would an annual report with one exception: 10-Qs aren't necessarily audited, so financials statements might not be in line with GAAP (see "Audits, Financial Statements, and You").

How to Dissect an Annual Report

Now that you know what an annual report is and where you can find one, let's look at what you need to know to decipher this staple in the investor's arsenal.

First, is the annual report's glossy "front matter." Since this stuff is pumped out by the company's public relations (or PR) machine, is it really worth reading? The short answer is yes, at least, at a glance. The glossy section of the report usually has a letter from management that's easier to read than what you'll find in the 10-K. Also, the glossy content can give you some decent snapshots at the company's performance and plans.

As technology has changed, so has the glossy annual report. For the online version of their 2007 annual report, Invitrogen (IVGN) decided to implement multimedia and interactive features to give investors a better look at the company, including a full-motion welcome from the vice president of investor relations.

While Web features like Invitrogen's video interviews with the CEO can be a great asset to investors, few things can compare to the cold, hard data you'll find in the 10-K. For Invitrogen's 10-K, check out this page on Yahoo! Finance.

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