The Disadvantages of Using Annual Reports for Evaluating Organizational Effectiveness

Organizational effectiveness is a function of organizational behavior and earnings performance. Common ratios for measuring organizational behavior include return on equity and return on assets. While the data for these ratios can be found within the annual report, analysts must be able to compare and contrast ratios from different companies in order to get an understanding for how one company performs. The annual report can provide the data, but ratios must be compared against other companies to be useful.

Financial Statements

The annual report is a requirement for all public companies as mandated by the Securities and Exchange Commission. It is meant to be a full-disclosure document with information about company earnings in the income statement, information about company assets and liabilities on the balance sheet, and information about the company's use of cash on the cash flow statement.

Marketing

In addition to financial statements, the annual report also contains a discussion from management about both historical and future operations. While the annual report is meant to be a full-disclosure document, it is also meant to be a marketing tool. As such, companies will highlight ratios that show growth or above-average performance.

Measures

Return on assets and return on equity are two of the most commonly used ratios for measuring operational effectiveness. The data is obtained from the annual report. These ratios must be compared against other companies in order to be insightful, however. Additionally, it important to remember that the annual report is only published once a year. As a result, the data may be old and irrelevant.

Conclusion

The annual report can be manipulated to the company's favor. While financial statements have been audited and are held to certain standards, the company is not obligated to discuss company signs of weakness or issues with organizational effectiveness. As a result, it is important for the investment analyst to look at both financial data as well as employee surveys to validate annual report data.

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