What Is an Annual Report? (Plus Purpose and Contents)

By Indeed Editorial Team

Published 16 November 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies use a variety of financial analysis tools to measure their performance over time and keep track of their assets and liabilities. One tool that a company can use is an annual financial report that it releases at the end of the financial year. Understanding what such a report is and how to read it can be beneficial if you're an investor or business professional who works with financial documents regularly. In this article, we explain what an annual report is, outline its purpose and discuss what you might find in one.

What is an annual report?

An annual report is a document that summarises a company's performance in the previous financial year, typically focusing on financial aspects, such as gross revenue, profits, expenses and debts. Companies often employ auditors to help them ensure that the information in their reports is accurate. These yearly reports may also contain information about the company's plans for the next year. Many companies publish their reports on their websites, making them accessible to anyone. Some smaller companies and family-run organisations may choose not to publicise their reports, instead only revealing them to potential investors and existing shareholders.

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Purpose of an annual report

The purpose of a yearly report may vary depending on the perspective of the person reviewing it. For senior executives and leadership personnel, a report can help them assess the company's assets and liabilities so they can make decisions about how to allocate resources. They may also use the information in this report to determine the future business objectives for the company and make plans to help it achieve these goals.

In contrast, shareholders might review a company's report to assess how well their investments in the company are performing. Potential investors might also want to review a company's annual financial report to determine whether it's viable for them to invest in the company. The report can help them determine whether the company is profitable and whether they're likely to earn returns on their investment.

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Contents of an annual financial report

Typically, annual financial reports follow a specific format to present information as simply as possible. The exact content may vary depending on the size of a company and its assets and liabilities. Here are some things a yearly report typically includes:

Business summary

The first section of a report is usually a business summary. It briefly summarises labour information, recent events and unexpected operating costs. The business summary is typically one or two paragraphs long.

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Risk factors

This section contains detailed information on the company's risk factors and explains how they've affected the organisation's financial performance in the previous year. It may also explore risk factors the company expects to encounter in the coming year. If there are significant risk factors, the company may devise plans to reduce the impact of these on its performance.

Property information

This section provides information on all of the company's owned and leased properties. It may include a description of each property, including what it's used for and the cost of maintenance, rent or other associated expenses. Sometimes a company might provide a copy of a lease agreement to verify financial obligations.

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Relevant financial data

The report contains any pertinent financial data that applies to the previous five years of the business's lifespan. This can include outstanding debts and investor capital. Debt information outlines who the lender is, what the interest rates are, what the terms of the loans are and how much the company has already paid off. It also details any collateral in place, which is an asset that a borrower leverages against the cost of a loan. Supplementary financial data in a report may include a company's balance sheet and income statement, which show a full list of its income and expenses.

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Stockholder information

This section includes information on the company's shares, dividends, shareholders and any other information related to market equity. Investors look at who owns stock in the company and how the stock's share prices have changed. They can also track the company's dividend history to find out how much of the profits it has disbursed to shareholders.

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Legal information

The legal information section details any of the company's legal proceedings from the past year. This can include filings on the company's behalf, such as business formation documents, or outstanding cases against the business. This section may also include any outstanding legal costs or potential future costs that may arise from ongoing litigation.

Analysis of financial condition

This section summarises management's view of the company's financial condition and performance over the past year. In some reports, you might also find predictions and forecasts for the company's finances in future years. Some professionals may also refer to this section as the management discussion and analysis (MD&A).

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Executive summary

This section details the company's leadership, including information on the executive officers and corporate governance. This can also include information on the executive earnings structure. You can refer to this section to find out how much the company is paying its senior executives and leadership personnel.

How to read an annual financial report

Some reports can be lengthy and include dozens of pages of financial information. Here are some steps that you can follow to read a company's report effectively:

1. Consider your objective

When reading a financial report, start by considering your objective. If you're an existing investor, you might be interested in finding out whether your investment is likely to generate returns. If you're a senior executive, find out whether the company is performing well and whether there's anything you can do to improve its performance.

Related: What Does a Finance Executive Do? (Roles, Skills and Salary)

2. Assess the company's performance using a relevant metric

Next, use a relevant metric to determine how well the company is performing. The metric you use may depend on your objective. For example, if you're an investor, you might examine the profits that the company earned in the previous year. If you're a senior executive, you might focus on the company's revenue growth.

3. Consider the future performance of the company

Using the historical financial data of the company and information in the report, you can assess the future performance of the company. Assessing whether the company is likely to perform well in the future can help you make decisions to further your interests. As an investor, you might choose to liquidate your investments in a poorly performing company. As a senior executive, you might consider implementing policies to improve the company's performance.

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Additional tips for evaluating annual financial reports

Here are some further tips for evaluating a yearly report:

  • Read the entire report. Consider reading the report in its entirety to understand the full scope of the company and learn how each sector interconnects.

  • Consider the debt-to-equity ratio. Understanding how equity relates to the company's outstanding debts may help you understand how to pay off those debts and become profitable.

  • Ask questions. Asking questions can give you a more complete perspective of the company. Ask about the company structure, plans for improvements and any prospects for new management positions.

  • Ensure consistency. Consistency in the report demonstrates expertise and attention to detail. It also helps organise information in a way that's easily accessible for any reading level.

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