If you want pick the best stocks to grow your wealth, 10-K filings are one of the most common and important documents you’ll need to read before investing in a company.
However, reading a 10-K filing can be an intimidating task for investors with no finance background, or those who are just starting out.
In this article, we’ll provide an introduction to 10-K filings, where you can find them and pin point key sections of the 10-K fillings that you should zoom into so that you can read them effectively and help you make better investment decisions.
What is a 10-K?
A 10-K is a comprehensive report filed annually by public companies to the Securities and Exchange Commission (SEC) that provides financial information about the company, including its assets, liabilities, revenues, expenses and other important information related to its operations.
Although the 10-K is also sometimes referred to as the annual report, bigger companies tend to produce a separate annual report which tends to be more visually impressive but generally more summarized version of the 10-K.
How to find the 10-K filing of any company?
Before you can dive into the company’s 10-K filing, you first need to locate it.
There are two common methods to find the 10-K filing of any company:
1) Search for “company name + ir + 10k” on any search engine
For example, if you’re looking specifically for Tesla’s 10-K filing, all you need to do is to search for “Tesla ir 10K”. The first result is usually the company’s investors relations website where you can download their latest 10-K filing.
This method works best if you’re researching on a single company.
2) SEC’s EDGAR
The SEC maintains a database called EDGAR (Electronic Data Gathering, Analysis and Retrieval) that includes all public company filings. You can search the database by company name or ticker symbol to access all of their public filings, including their 10-K.
This method works better if you’re studying several companies in a sitting – you can download all the 10-K filings from the SEC instead of having to browse through multiple companies websites.
Understanding the different sections of a 10-K
A 10-K report has several sections, these are the most essential ones to look at:
- Business
Description of what the company does. This is the section you should read to understand what the company offers and how it makes money.
- Risk Factors
Listed in order of importance, this gives you an idea of the key risks the company faces and what could affect their performance.
Given the current volatile macro conditions, you may also want to take a closer look at the following section:
- Quantitative and Qualitative disclosures about Market Risk
This is where the company reports the economic risks from “foreign exchange rates, interest rates, credit risk, and equity prices”. Some companies may have exposure to derivative assets and other equity investments which could impact their short term cash flow and survivability.
- Financial Statements and Supplementary Data
Audited financial statements including income statement, balance sheet and cash flow statements. Here, you’ll find detailed financial information from the company, over the past three financial years.
- Management’s Discussion and Analysis of Financial Condition and Results of Operations (aka MD&A)
This section is where the company’s management shares their point of view on the company’s latest performance. You can get a glimpse of insight to how the management approach their business here.
Analyzing financial statements in the 10-K
Financial reports such as the income statement, balance sheet and cash flow statement are important to understand a company’s business and financial health.
In summary,
- Income statement: tells you how the company makes money
- Balance sheet: tells you how efficient the company is at using their money, and the company’s financial health
- Cash flow statement: tells you where and how their money is being used
Learning to read financial statements is a process that you should not skip as an investor. However, it would take more than an article go through it all, so I won’t be diving into the details here.
If you’re new, Alvin has written a good overview from which you can start from.
Reading notes to financial statements in the 10-K
The notes to financial statements provide more in-depth information on the company’s financials such as details on related parties, significant accounting policies and their assumptions etc.
These are important for you to understand if you’re digging deep into a company’s financial standing. You can usually find references to these notes in the financial statement, and the notes are usually appended at the end of the 10-K filing.
Conclusion
Learning to read a 10-K filing is an essential skill for any independent investor. It allows you to learn more about the company that you may want to invest your hard earn money into.
I hope this article has been informative and helpful in covering the basics of reading a 10-K filing.
Now, you can start doing your own research effectively before you decide to invest. Godspeed!