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Reading an Annual Report
by WealthEffect Staff


Begin (at the end) with the accountants' report
  The letter to shareholders highlights the priorities of senior management  
  Management's Discussion and Analysis reviews actual performance  

As a first step in reading an annual report, look near the end for the Report of Independent Auditors. In the last paragraph, you should see the words, "present fairly," indicating that the books are in order. In the very rare case where those words don't appear, move on to the next company.

In the first few pages of the annual report, the chairman and the chief executive officer of the company offer an overview of the company's progress. This letter to shareholders gives senior management the opportunity to explain results and to define priorities. It also gives you the opportunity to get a sense of the people with whom you might invest (buying stock is both a bet on a business and on a management).

In Coca-Cola's 1998 annual, Doug Ivester presents his take on a disappointing year EPS fell and stock price significantly underperformed. Without ignoring the negatives, he makes two important points: (1) "Businesses fixated on the short term could have easily shunned the United States in the 1930s, Europe in the '40s, Latin America in the ' 70s, Africa in the ' 80s" and (2) "…we would much rather manage a business in nearly 200 countries than try to build a business in nearly 200 countries."

Overall, Ivester's message communicates sincerity and focus — the two qualities you should be looking for. Though not as educational as Warren Buffett's or as extensive as Harvey Golub's (American Express), this letter to shareholders serves as a solid introduction to an extremely informative annual report.


Management's Discussion and Analysis presents the details which determine the bottom line: volumes, prices, production costs, operating costs, interest expenses, taxes. For Coca-Cola in 1998, this section was a roller-coaster.

To join the ride, go to the next article, Income Statement.