Right now is one of my favorite times of year because I’m an investing nerd. Why? Because it is the time of year when most companies send out their annual reports and ask their shareholders to vote on various issues. Being an “owner” of a publicly traded company (i.e. shareholder), I find going through these statements and reports to be interesting. I also like to take a look at the income and balance sheet, as well as read the notes attached (usually there is better information in these notes than anywhere else).
If you’re interested in really analyzing a company, and even doing a SWOT analysis for investing, the annual report is where you start.
Here is what you should expect when you get your annual reports and proxy cards.
The Annual Report
Many people assume the annual report and the 10-K are the same thing, but in reality, they are not. The annual report is usually a nice, glossy, book provided to shareholders by the company. Inside, it usually has about half dedicated to company information and trends, and the second half dedicated to financial statements. This half is the 10-K, the financial report submitted to the SEC every year. Most companies bundle them together, but some don’t, so just be aware.
When I receive my annual reports, I look at the following, and you may want to as well.
I like to read through the company highlights and see where the companies I invest in are trying to compete. Companies usually highlight growth strategies, new products being developed, and more in these pages. Reading through them can give you a real sense of how your investment is going to perform, because you can see first hand what products your company is developing and what markets they intend to enter and/or grow in.
The consolidated statement of earnings is just like it sounds – it’s where and how the company made it’s money. It also shows you how much a company is spending on major initiatives. On this statement, I look at the following:
- Net Sales Growth (It should always be growing)
- Cost of Goods Sold (It is growing faster or slower than sales?)
- R&D Spending (Is the company actively developing new products?)
- Overhead costs (Sometimes labeled administrative or general – is it rising faster than sales growth?)
- EBIT (Earnings Before Interest and Taxes) – Growth over time is good
How a company is making it’s money says a lot about how it will continue to make it’s money. With that, how a company is spending it’s money says MORE about how it will continue to spend it’s money. So keep those in mind when looking at the statement of earnings.
The balance sheet is the go-to place to see how much debt a company has. And I care about debt because too much of it is a bad thing (just like in personal finance!). Here are some things I look at on the balance sheet:
- Short-Term Borrowings (Increasing or decreasing?)
- Total Current Liabilities (I like to see liabilities decreasing usually)
- Long-Term Debt (I like to see this steady or decreasing, however, given historical low interest rates, this could be beneficial to other types of financing right now)
- Post Employment Obligations (This is the line of pension funding, and it is also where a lot of companies are getting into trouble, so pay attention here)
The bottom line on the balance sheet: current assets need to be a lot more than current liabilities. As I mentioned above, long term debt can be a good thing right now, but also pay close attention to pension liabilities.
Notes to Consolidated Financial Statements
The notes to the consolidated financial statements are pure gold. These notes highlight everything you could want to know about a company and how they are handling things financially. Some things I like to be aware of:
- Biggest Concentrations of Risks for the Business
- How revenue is recognized (varies by industry, but important to know)
- How pension benefits and liabilities are calculated (Look at growth, plans asset’s, and return on plan’s assets)
- Updates on long term investments (more important for some companies vs. others)
- Updates on potential liabilities arising from lawsuits
- Look at rates on debt and lines of credit
- Outcomes of any restructuring plans
Other Fun Things to Check Out
Finally, just for kicks, I also like to check out how much a company actually paid in taxes. I find this interesting, especially how they are able to offset a lot of income. I also like to look at executive compensation. Not just how much each person makes, but the weird perks they sometimes request as part of their compensation (like magazine subscriptions).
The Proxy Vote
The proxy vote is your right as a shareholder to vote on various activities of the company. Some votes are binding, meaning the decision of a majority of shareholders makes the outcome go into effect. Others are non-binding, meaning they are mere solicitations of opinions of the shareholders of the company. These votes are sometimes put into effect by company CEOs, since they do listen to shareholders as owners.
For most types of stock, 1 share equals 1 vote. However, there are company structures where a certain class of shares gets more votes (For example, Class A shares get 10 votes per share, Class B shares get 1 vote per share). These structures are usually designed to keep founders or original owners in control of the company.
Also, as a shareholder, you can submit your own proposals for a vote, if you get enough ratification signatures to get it on the proxy. Many large companies usually have a number of shareholder proposals, and there are some individuals, known as activist shareholders, who simply buy shares of a company to get certain proposals on the agenda. These have become more common in recent years, and I will give some examples below.
With any item on the proxy, the current Board of Directors of a company will provide recommendations on what shareholders should vote for and against. It is very common to see Boards want shareholders to vote for the binding votes, and against any shareholder proposals.
- Election of the Board of Directors (These are the individuals who will represent your interests in the company throughout the year)
- Ratification of the Accounting Firm who will audit the company’s financial statements
- In certain circumstances, shareholders may have to vote for the following:
- Company spin-offs or mergers
Here are some common non-binding votes that have become common over the last few years:
- “Say on Pay” initiatives, where shareholders can vote on executive compensation to prevent huge payouts for poor performance and golden parachutes
- Lobbying Disclosures, where shareholders can vote to have companies either disclose lobbying practices, or stop them all together
- Initiatives for green energy or sustainability requirements
- Prohibitions against animal testing
- Different types of incentive compensation plans
- Different board structures with more independent directors
The great thing about being a shareholder is that you get to choose the course of your company, so make sure you do read up on these and vote accordingly.
The Shareholder Meeting
The shareholder meeting is where all items from the proxy statement are resolved and voted upon. As a shareholder, you can attend, but you usually must RSVP in advance. Many companies make the shareholder meeting part meeting, part trade show. As such, they like to showcase their products, have sessions for investors to interact with company leadership, and more. However, at the end of the day, the meeting is designed to vote on the outcome of the proposals and set the agenda for the company’s next year.
Readers, do you read your company’s annual reports? Do you vote your proxy? Have you ever attended a shareholder meeting?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.