In this article
An annual report is a company’s formal account of its year. It is written for shareholders, but anyone curious about a business, whether as an investor, a job seeker, a supplier or a journalist, can learn a lot from it.
Key facts
- US listed companies file an annual report called Form 10-K with the Securities and Exchange Commission, free to read on the SEC’s EDGAR website.
- UK companies file accounts with Companies House, also free to search online.
- Three core statements tell most of the story: income, balance sheet and cash flow.
- The notes often contain the most important details.
Where to find one
Listed companies publish annual reports on their websites, usually under “Investors”. In the US, the official version is the Form 10-K, which you can search for free on the SEC’s EDGAR database. Large companies must file it within 60 days of their financial year-end, smaller ones within 75 or 90 days. In the UK, company accounts are available free on Companies House; private companies must file within nine months of their year-end and public companies within six.
Start with the letter, then check it
Most reports open with a letter from the chair or chief executive. It tells you how management wants the year to be seen. Read it, note the claims, then test them against the numbers.
The three core statements
| Statement | What it shows | Key question |
|---|---|---|
| Income statement | Revenue, costs and profit over the year | Is the business making money, and is that improving? |
| Balance sheet | What the company owns and owes on one date | Could it survive a bad year? |
| Cash flow statement | How cash actually came in and went out | Do reported profits turn into real cash? |
The cash flow statement is the one beginners skip most often, and it is often the most revealing. A company can report a profit while running short of cash, for example if customers are slow to pay.
Five numbers worth checking
- Revenue growth: compare this year with last year and with competitors.
- Operating margin: operating profit divided by revenue shows how efficiently the business runs.
- Operating cash flow: should broadly track profit over time.
- Debt and interest costs: matter more when interest rates are rising.
- Inventory: a sudden rise can mean products are not selling, or that the firm is building a buffer against supply problems.
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Read the notes and the risks
The notes to the accounts explain how the numbers were calculated. They disclose borrowing terms, lawsuits, pension obligations and changes in accounting methods. Important details often sit here rather than in the headline figures.
Reports also include a section on principal risks. It is written cautiously, but it shows what management worries about: currency swings, key customers, regulation or, increasingly, supply disruptions of the kind described in our article on how businesses are rethinking supply chains.
Compare, compare, compare
A single report tells you about a single year. Put three to five years side by side to see trends, and compare with at least one competitor. Differences in margins, cash generation and debt often say more than any one figure.
Please note: this guide is general information, not investment advice.
Red flags to look for
- Profits rising while operating cash flow falls year after year.
- Frequent changes of auditor, or an auditor’s report that includes a “material uncertainty” about the company’s ability to continue.
- Large one-off “exceptional” costs that appear every year.
- Debt growing much faster than revenue.
- Unexplained changes in accounting policies, described in the notes.
A mini glossary
| Term | Meaning |
|---|---|
| Revenue | Money from sales before any costs |
| Operating profit | Profit from the core business, before interest and tax |
| Net profit | Profit after all costs, interest and tax |
| Equity | What would be left for shareholders if all debts were paid |
| Free cash flow | Cash from operations minus spending on equipment and buildings |
Reading the auditor’s report
Near the financial statements you will find a short report from an independent auditor. Most say the accounts give a “true and fair view” or are “presented fairly”. Pay attention if the report is “qualified”, which means the auditor disagrees with part of the accounts, or if it mentions a “material uncertainty related to going concern”, which means there is real doubt the company can keep operating. Either is a serious warning sign.
Auditors also list “key audit matters”: the areas they found hardest to judge, such as how inventory or intangible assets were valued. These tell you where the numbers depend most on management’s estimates.
Frequently asked questions
Are annual reports audited?
The financial statements in a listed company’s annual report are checked by an independent auditor, whose report is included. The narrative sections, such as the chief executive’s letter, are not audited in the same way.
What is the difference between an annual report and a 10-K?
In the US, the 10-K is the formal filing required by the Securities and Exchange Commission. Many companies also publish a glossier annual report for shareholders that includes the same financial statements.
