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Lesson · about 8 minutes

How to read an annual report

Every listed company publishes three core statements once a year. They answer three questions: did it make a profit? (income statement), what does it own and owe? (balance sheet), and where did the cash actually go? (cash flow statement). We'll read them using Coca-Cola's real figures for 2025.

1. The income statement: did it make a profit?

Read it top to bottom. Each line takes away a different kind of cost, and the margins tell you how much of every dollar of sales survives each step.

Revenue (sales)Everything customers paid for the year$47.9bn
− Cost of what it soldMaterials, manufacturing, delivering the service−$18.4bn
= Gross profitGross margin 61.6%: pricing power shows up here$29.5bn
− Running the businessStaff, marketing, research, offices−$15.8bn
= Operating profitOperating margin 28.7%: the core business's profitability$13.8bn
− Interest on debt−$1.7bn
− TaxEffective tax rate 17.9%−$2.9bn
= Net income (the 'bottom line')Net margin 27.3%$13.1bn
Earnings per shareNet income split across 4.31bn shares. The 'E' in the P/E ratio$3.04

What to look for: revenue and margins rising over several years. One year tells you little; the company page shows ten.

2. The balance sheet: what does it own and owe?

A snapshot on the last day of the year. It always balances: everything the company owns was paid for either by borrowing (liabilities) or by shareholders (equity).

Total assets (what it owns)$104.8bn
of which cash and investments$10.3bn
of which current assetsCash, stock and money owed to it within a year$31.0bn
Total liabilities (what it owes)$72.6bn
of which borrowings$43.6bn
of which due within a year$21.3bn
Shareholders' equityAssets minus liabilities: the owners' stake on paper$32.2bn

What to look for: Coca-Cola owes $33.3bn more in borrowings than it holds in cash. That's normal for steady businesses, but compare it with profits: net debt is 2.4× operating profit (under 3× is usually comfortable). Current ratio 1.46: above 1 means short-term assets cover short-term bills.

3. The cash flow statement: where did the money go?

Profit is an accounting opinion; cash is a fact. This statement shows the cash that actually came in and went out, which is harder to dress up.

Cash from operations0.57× net income: above 1 means profits are backed by real cash$7.4bn
− Investment in the business (capex)New factories, data centres, stores, equipment−$2.1bn
= Free cash flow11.0% of sales. The cash available to reward owners or grow$5.3bn
Dividends paid−$8.8bn
Shares bought back−$746m

What to look for: free cash flow that's positive every year and growing, and dividends plus buybacks that don't regularly exceed it (otherwise they're funded by borrowing).

Putting it together

  1. Is it profitable? Coca-Cola kept 27.3% of its sales as profit.
  2. Is the profit real? Operating cash flow was 0.57× net income.
  3. Does it earn well on its capital? Return on invested capital was 17.2% (above 10–15% is good).
  4. Is it financially safe? Net debt of $33.3bn.

Next: see these numbers over ten years, with grades and the bull and bear case, on Coca-Cola's page, or read the glossary for any term.

Figures from Coca-Cola's latest annual report (10-K) filed with the US Securities and Exchange Commission. Some companies label lines differently, so a few rows may be missing.