A shareholder report is a company's summary of its performance over the past year presented by management. This report contains many pages of numbers and details about the business's operations and can be overwhelming to review in its entirety. The average reader who is not a financial professional can glean the most from the reading of a shareholder report by focusing on a few key parts. Sections to read carefully are the letter to shareholders, the auditor's opinion, the income statement and balance sheet, the footnotes to the financial statements, and management's discussion and analysis. A reader can gain a good overall picture of the company with this information.
The letter to shareholders is designed to summarize the results of the prior year for the business and is generally written in less technical terms for a broad audience. Sometimes it is written by management as a group and sometimes there will be individual letters from senior executives. Whatever the results, the report will be couched in the most positive language possible. Things to watch out for include explanations of poor performance as the consequence of factors outside the company's control and optimistic outlooks for the future despite lackluster current results.
For public companies, a required part of the annual shareholder report is the written opinion of an independent auditor as to whether the report presents a fair and accurate representation of the company's performance, i.e., an "unqualified" opinion. An auditor whose opinion is "qualified" has found something in the company records that does not conform to accepted accounting practices or possibly represents the misstatement of results. Anything other than an "unqualified" opinion is a warning sign.
The income statement and balance sheet are two of the basic financial statements that outline, respectively, the company's profit or loss for the period and the financial position of the company at the end of the period. Basic numbers to look for on the income statement are the amounts of growth in sales and earnings from one year to the next. A growth in expenses without a corresponding increase in sales is a potential problem. Look for any unusual large amounts in "Other Income and Expenses" that may distort the results for the year. This category describes items that are outside the scope of routine operations and may be one-time occurrences.
On the balance sheet, compare the current assets to the current liabilities to see the current ratio, one assessment of the company's liquidity. If the ratio is less than one, i.e., current liabilities are higher than current assets, the company may have difficulty staying up to date with its obligations. Another key ratio is debt to equity, i.e, the comparison of all the company's debts, both short-term and long-term, to its total equity. If the result is more than 50%, the business is highly leveraged, or indebted. If the current ratio is low and the debt to equity ratio is high, the combination of these two indicators may signal serious issues for the company.
Read the footnotes to the financial statements. These detailed explanations will assess any unusual entries in the financial part of the shareholder report and cover the accounting policies used to estimate the numbers. Footnotes also disclose how income taxes are calculated. Readers will find out about pension plans and stock options, who benefits from these programs, and how they affect the company's performance.
Management's discussion and analysis is an assessment by executives of the company's position and outlook for the future. It includes information about items not included in the financial statements such as contracts, pending litigation, derivative arrangements, and letters of credit. The intent of this portion of the shareholder report is to reveal items that may be material to the business although they are not part of the specific financial statements.