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Finance 1, The Annual Report: Part I of "Learnin's From My MBA" Series


Hello again!

Since I started writing my series on the culture of an MBA program, I've had a lot of questions from readers. I've tried to address most of them in that series, entitled " A Scientist in an MBA Program." But a lot of the questions dealt with the specific material taught in an MBA program--it seems that, rather than a preview of the culture, a lot of people wanted a preview of the actual material taught in a typical program.

As it was hard to incorporate that into a series meant to discuss the culture differences between science grad school and an MBA program, I've decided to start a whole new series. Entitled " Learnin's From My MBA," it'll take business concepts that I learned at MBA school and present them to an audience of scientists with no business background.

This series isn't going to try to teach you everything you'd learn in an MBA program, only to give you a flavor of some of the subjects, get you acquainted with some of the concepts, and get you speaking some of the language. I'm going to try to hit most of the major ideas I've been learning in class.

Finance 1: The Annual Report (Overview)

I've decided to start out this series with a look at finance. I picked this subject first deliberately: It's probably the most foreign to a person working at a lab bench, and it intimidates most people. Everyone's got visions of Wall Street (or Bay Street, or some other street, depending on the country you live in), big high-powered execs in $5000 suits doing elaborate number-crunching and crazy things with spreadsheets. But, as you'll see, it's really not as hard as it looks.

Instead of starting with basic concepts and moving slowly toward analysis, the way you'd learn it in finance class (incidentally also the way, for example, a biochemistry class would be taught), I've decided to dive right in: We're going to take a real-life annual report, and I'm going to teach you what each line in it means, starting with the Income Statement.

We're going to do this in seven parts. This first part is an overview of the Annual Report. Over the next couple of months, we'll be dissecting different sections of the report: Part 2 of this series will discuss the President's Message and Company Overview; Part 3 will discuss the Income Statement; Part 4 will discuss the Balance Sheet; Part 5 will discuss the Cash Flow Statement; Part 6 will discuss the "Notes" section; and Part 7 will discuss some of the basic analysis finance folks use to evaluate each of these sections. No matter what company's annual report you look at, the sections of the report will pretty much follow these requirements. Please note, however, that the actual analysis and specific meanings of each minutiae of the report may change from country to country: I'm just trying to teach the basics.

The Annual Report

An Annual Report is the report every public company is required to make, once a year, to its shareholders. It contains a whole lot of information about the company, usually including an introduction, a description of the business they're in, a look at the company's future plans, and a whole bunch of financial statements. Basically, it contains the story behind the company and its financial worth.

The Annual Report is the basis of financial evaluation. And the nice thing about it is that it's pretty standardized--one annual report will look a lot like any other.

The report we're going to look at is for a real company called Alta Genetics Inc. As you might gather from its name, it's a biotech/genetics company, based in Alberta. I picked this company pretty much at random--I had never heard of it before grabbing the annual report out of the library this morning. But I'll be using it through the rest of this finance series. Remember that we'll be using the statements from this annual report as a way of learning the language of finance, and we probably won't analyze the company that much, so don't let this series influence whether you're going to buy their stock! But in order to understand finance, we've really got to have a real-life example. I'll be putting sections of that report in my analysis, but if you want to follow this series carefully, I suggest you download the report. It's available, free (of course), in .pdf format, at

Corporate Profile and Executive Summary

Opening up to the first page of Alta Genetics Inc.'s annual report, we see an insert entitled Corporate Profile. Most annual reports will have some kind of executive summary of this kind: two or three pages highlighting the best the company has to offer. It's highly editorialized, but it gives you a good idea of what the company sells, what it's about, where it's going, and what they're most proud of. In the case of Alta Genetics, we find that they provide a full spectrum of genetic products and services for beef and dairy cattle. The Corporate Profile provides a page on their strategic directions, a discussion of their marketing plan (including a description of their key markets), and their projections for growth. Also included is a brief summary of their financial figures and the names of the people on their board of directors.

The executive summary is a great way of getting acquainted with the company, but it isn't much more than that. So read it, but don't pay too much attention to its details, just the main vision.

Financial and Operating Highlights

Right after the Corporate Profile, Alta Genetics Inc. has a page describing their financial and operating highlights. Again, this section is highly editorialized: It's the financial information they're most proud of, or the basic information that they think someone would want to know. We'll be covering most of these financial statistics and key ratios in Part 7 of this series, where we do some analysis of the numbers. The headings and meanings of the information given in this section won't be important till then.

President's Message

Flipping the page, we get to the President's Message. Just about every annual report has one of these. Again, this section is written in pretty close to layperson's language, and it gives a basic overview of what the president of the company feels are the most significant achievements of the year. This section will also give excuses, or reasons for poor performance, if the company didn't do so well. Again, this is an editorialized version of the company, but it's meant to give readers a look at the soul behind the company: what it stands for, who's in charge, and where the company is going. It's a hello from the president to the shareholders--the speech s/he would give at the annual meeting.

Management's Discussion and Analysis

This section starts to look at the nitty-gritty. It's like the president's message, but a little lower down the food chain--it's an address from the heads of the different sections of the business. Here, the operations manager lets you know how the factories are doing. The marketing manager talks about revenue, advertising, marketing, and the like. Research and development discusses what they're most proud of--the amount spent on research, the new discoveries for the year, and a quick look at what's to come. Every section of the business gets to discuss how it contributed to the growth of the company.

This section is, again, a qualitative look at the strengths and weaknesses of the company: It's where the sales manager gets to make excuses for a lousy sales year, where the R&D department talks about new advances and the impact it will have, and so on; it gives you a closer look at the big picture.

Auditor's Report

Every annual report will have one of these: It just says that some accounting firm somewhere audited the financial figures given in the report and found them to be representative. It doesn't mean that the firm feels the company is doing well, only that they believe that the figures shown in the report are an accurate depiction of the company in question.

Balance Sheet

The balance sheet is a list of the assets and liabilities of a company. Basically, this lets you know the tangible things the company owns, like buildings, land, lab equipment, and the like, and what it owes the bank. The difference between what it owns and what it owes is put into a third section called Shareholder's Equity--it's the portion of the company that is owned by the shareholders (or owners of the company). This number is pretty close to meaningless, as we'll find out, but the balance sheet can tell us a lot about a company.

Income Statement

The income statement is where we really see what happened to the company. It shows how much stuff the company sold in the year, how much it cost them to make that stuff, and what it had to spend on expenses, like research, interest, or salespeople. Here you get a good idea of what the company's really doing: how they're making their money, and where they're spending it.

In the case of Alta Genetics Inc., this statement is called a Consolidated Statement of Loss rather than an Income Statement, because, like many biotech companies, they're losing money right now and not making any income.

Cash Flow Statement

The cash flow statement is the third important statement that's got to be in every annual report. Basically, as the name implies, it gives you a look at the flow of cash: every time money was taken in by the company and put in the bank, and every time money was withdrawn from the bank. It's a lot like the bank statement you get every month, and like mine, in the case of Alta Genetics, it appears that they spent more money than they had. But we'll be looking at this more closely soon.

Notes to Financial Statements

This is the section that gives details and reasons for the numbers in the other three financial statements. Here's where the excuses are made and where the weird stuff is explained. It's probably the most important and most complicated part of the annual report, which is why we'll be discussing it last.

So there you have it--the parts of an annual report. In the next few months, we'll be learning what each part says (such as the President's Message), and what it all means.

Next: Finance 1, The President's Message in the Annual ReportPart II of "Learnin's From My MBA"