Public Companies and Analysis

The Best Way to Learn About a Public company
The best way to learn about a public company is to look at that company's annual report. Every public company in the USA is required under Corporation Law to publish an annual report. The Corporation Law sets out the minimum information standards that they have to put in their report.

One of the most important is that an independent auditor's report is included. This report comments on the accuracy of the accounts of the company and gives any qualifications on the financials if any are shown up from the audit investigation.

The comment as to the reliability and integrity of the financial accounts is a very important thing as far as shareholders or the public is concerned. The annual report is more than just a glossy booklet containing colour photographs and information that is designed to give the shareholder an impression of a successful company. You should always look deeper into an annual report and see whether it is a document of facts and recommendations or whether it is a selling tool on behalf of the company directors.

Main Sections in an Annual Report
Perhaps one of the most important parts of any annual report is its financial statements. People who invest in a company are interested in receiving a good financial return on their investment. It is important therefore for you as an investor to look a bit closer into the financial information that the annual report contains. Unless you are clear that the financial statements show the performance of the company fully and its future products then you are not gaining the benefit out of the company's annual report.

The annual report is made up of the following sections:

  • A Chairman's Report.
  • Statement of Financial Performance.
  • Statement of Financial Position.
  • Cash Flow Statements.
  • Comment on trends.
  • Shareholder Statistics.
  • Report from Auditors.

Why Annual Reports are essential to Investors
Annual reports are important because they provide the necessary financial information that any member of the public or a shareholder in the company needs to know. The public company has to publish an annual report which has to contain a true and fair representation of the company's financial situation.

Everyone that is a shareholder in the company is entitled to a free copy of the annual report and they are also available free to other members of the public who could have a financial interest in the company.

The annual report provides essential information to shareholders and potential investors and will normally have the following statements in the following categories:

  1. Statement of Financial Performance (Profit & Loss Account) This will show the company's financial results for the year.

  2. Statement of Financial Position (Balance Sheet) This sets out the assets and liabilities that the company owns as well as owes at that particular time. Assets are owned by the company, liabilities are the amounts which are owed by the company. Shareholders funds are the difference between the assets and liabilities and represent the amount that is owned by the shareholders in the company.

  3. Statement Of Cash Flow. This shows where the company's money has come from and where it has gone. It is one of the most important pages in the report because it tells the reader the bottom line about the real cash and how it is treated in the financial books. The cash flow statement is simply a tool that records cash coming in and cash going out so it is less prone to any adjustments or manipulation by the company itself. It is a good means by which potential cash flow problems that the company will try to conceal is brought into the open. It is often the first statement that indicates whether a company is having serious financial problems or will experience a good cash surplus in the future.

  4. Statement of Report By Auditors. The auditors job is to investigate and ensure that the results portrayed by the company in its annual report and financial affairs are a true and fair representation. They therefore audit and verify that accuracy. If there is anything untoward that needs to be brought to the attention of shareholders or the public then they will qualify the report. To qualify means that they will tag the report with comments on particular areas where they are either not happy or where they feel a further statement needs to be made to clarify the company's financial situation. The auditors are elected by the shareholders of the company as their representative but they act independently.