NAME __________________________________________
How to Read an ANNUAL REPORT
Name of Company _________________________________
Headquarters Address:
__________________________
__________________________
YEAR of ANNUAL REPORT ________________________
Start at the Back (Report of Independent Public Accountants)
1.
Who is the certified public accounting firm? ___________________________________
GO TO THE FRONT – (Letter from the Chairman)
1.
To whom is the letter addressed? ____________________________________________
2.
Who is the CEO/Chairman of the Board? ______________________________________
3.
How did the company do this year? __________________________________________
_____________________________________________________________________________
4.
What are the reasons for how the company did this year? _________________________
_____________________________________________________________________________
5.
What does the future look like? Why? ________________________________________
_____________________________________________________________________________
BALANCE SHEET NUMBERS – Financial Position (Assets = Liabilities +
Owners Equity) What a company owns and owes and its net worth.
ASSETS:
1.
Cash? _________________________________
Is there enough Cash to cover a $1,000,000 purchase? ________________
2.
Inventories/Finished Goods? ___________________________
3.
Receivables? ___________________________
4.
Total Current Assets? ________________________
5.
Total Assets? ____________________________
LIABILITIES:
6.
Current Liabilities? ________________________
7.
Long-term Liabilities (Debt)? _______________________
STOCKHOLDER’S EQUITY:
8.
Owners’ or Shareholders Equity (Assets – Liabilities)? ___________________________
INCOME STATEMENT NUMBERS – Profitability (Revenues – Expenses)
Determines Profit or Loss
1.
Net Sales? __________________________
2.
Net Income (or Loss)? __________________
3.
Earnings Per Share? ____________________
Ratio Analysis of Financial Statements:
Time Series Analysis – Analysis of a firm over a period of time.
Cross-sectional Analysis – Analysis of several firms in the same industry at a point in time.
Liquidity Ratios – The ease with which a company can convert its assets to cash in order to pay
off its debts.
LIQUIDITY RATIOS:
The Current Ratio: (The ratio of current assets to current liabilities)
1.
Current Ratio = Current assets / Current liabilities (should be at least 2:1)
The Quick Ratio: (The ratio of current assets minus inventory to current liabilities)
2.
The Quick Ratio = Current Assets – Inventory / Current Liabilities or Cash + Cash
Equivalents + Accounts Receivable / Current Liabilities (should be at least 1:1)
ACTIVITY RATIOS:
Inventory Turnover Rate: (How many times you turn over you sell and restock inventory)
3.
Inventory Turnover Rate = Cost of Goods Sold / Average Inventory (beg inventory +end
inventory2)
PROFITABILITY RATIOS:
Net Profit Margin: percentage earned on sales
4.
Net Profit Margin = Earnings after interest and taxes / Sales
Gross Profit Margin: Percentage earnings on sales before considering operating expenses,
interest, and taxes.
5.
Gross Profit Margin = Revenues – Cost of goods sold/Sales
Return on Total Assets (ROA): percentage earned on assets
6.
Return on Total Assets = Earnings after interest and taxes / Total assets
Return on Equity (ROE): percentage earned on equity
7.
Return on equity = Earnings after interest and taxes / Equity
LEVERAGE RATIOS:
Debt to Equity Ratio: ratio of debt to equity
8.
Debt to Equity Ratio = Long-term liabilities (debt) / Shareholders Equity
Debt Ratio: proportion of assets financed by debt, a measure of financial leverage
9.
Debt Ratio = Long-term liabilities (debt) / Total Assets
COVERAGE RATIO:
Times-interest-earned: ratio of operating income to interest expense
10.
Times-interest-earned = Earnings before interest and taxes / interest