Insights · Letter No. 6 · Research
How to read a 10-K without drowning
A company's annual report is the most honest document it publishes. You don't have to read all 150 pages. Here is where to look.
Every U.S. public company files an annual report on Form 10-K with the Securities and Exchange Commission. Unlike a glossy shareholder brochure, the 10-K follows a required structure, is reviewed by auditors in its financial sections, and carries legal liability for what it says. It is free to read on the SEC's EDGAR database.
Where to find it
Search the company's name or ticker on EDGAR full-text search or the company's own investor relations page, and filter by form type "10-K." Quarterly updates are filed on Form 10-Q, and significant events on Form 8-K.
The sections that matter most
- Item 1, Business. What the company does, how it makes money, its segments, customers, and competition. If you can't explain the business in two sentences after reading this, stop here.
- Item 1A, Risk Factors. Management's list of what could go wrong. Much of it is boilerplate; look for risks that are specific, new since last year, or oddly prominent.
- Item 7, Management's Discussion and Analysis (MD&A). Management explains the year in its own words: what drove revenue and margins, how cash was used, and what trends it sees. Read it alongside the numbers.
- Item 8, Financial Statements. The income statement, balance sheet, and cash flow statement, plus the auditor's report and the notes. The notes often hold the most important details: debt terms, leases, pensions, revenue recognition, lawsuits.
Five questions to answer
- Is revenue growing, and why? Price, volume, acquisitions, or currency?
- Is the business converting profit into cash? Compare net income with cash from operations over several years.
- What does it spend to stay in business? Capital expenditures relative to operating cash flow.
- How much debt is there, and when is it due? Check the maturity schedule in the notes.
- Did the auditor flag anything? Look for "going concern" language or critical audit matters.
Habits of careful readers
Read at least two or three years side by side; trends tell you more than any single year. Compare the company with one close competitor. Note how many times you have to reread a paragraph: complexity is sometimes a warning sign. And remember that a 10-K tells you about the past. Judging whether a stock's price already reflects all of this is a separate question.
This letter is general education, not a recommendation to buy or sell any security. Consider your own situation, and a licensed professional, before making financial decisions.