How to Explain the Quality of Annual Reports

According to Investopedia, public companies are required to file a report once a year updating shareholder on the operations and financial condition of the company. At the beginning of the report, the company will chronicle the events of the past years with pictures and graphics. Next, the report will detail the financial condition of the business with a balance sheet, an income statement and a statement of cash flows. Also, the company will include any further explanation of the financial statements in the notes to financial statements. Ultimately, a quality annual report will have a high amount of transparency. This means that investors and analysts can easily see from the annual report how each area of a business performed in the past year.

• 1

  Obtain a copy of the annual report. Interested parties can usually request a copy from the company's website. Most companies will host a conference call open to analysts and investors. This call can prove useful by hearing concerns voiced by either the analysts that follow the company of by investors.

• 2

  Review the previous year's annual report. Look for sections where management provides guidance for the activities in the upcoming year. Using this guidance, analyze the current annual report to evaluate the success or failures of the business in these areas.

• 3

  Analyze the financial statements. Find the cash flow from operations or also known as EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) according to Investopedia. Use this cash flow figure and compare it to the increase in the cash account on the balance sheet. If the company has a high percentage of the operating cash flow show up in the cash account, this will represent a high quality of earnings for the year. If a high percentage of the operating cash flow does not show up in the cash account, management should detail where this cash went in the annual report.

• 4

  Calculate the DSOs (Day Sales Outstanding). According to Investopedia, an analyst can calculate the DSOs by dividing the accounts receivable by the sales made by credit and multiply the result by the number of days. The DSO number will represent the number of days a product or service has been sold and the cash has not been collected. An abnormally high DSO figure represents a low quality sales figure.