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.
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.
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.
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.