What's the value of an annual report?

Posted: February 14, 2013

Q: Do annual reports indicate how overvalued or undervalued a company's stock is?

- R.N., Jacksonville, Fla.

A: Not usually, but you'd do well to read your holdings' annual reports anyway. If you're a novice, at least read the chief executive's letter to shareholders, which offers a sense of management character and the company's strategic plan. The financial statements can be even more informative. The balance sheet will show the firm's financial health at one point in time, including its cash, money it owes, money owed to it, etc. The income statement (or the statement of operations) shows sales, costs and profits over a period of time, while the statement of cash flows will list all of the company's cash inflows and outflows during the period.

The more familiar you become with financial statements, the better chance a portfolio will perform well.

Annual reports don't focus on companies' valuations. For that, look up a company's current market value via online stock quotes. You can also calculate it yourself by multiplying current stock price by number of shares outstanding.

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