What Fundamental Analysts Should Know About the 10-K
If you’ve ever run a 10-K race, you know that it can be pretty grueling if you haven’t trained properly. The same goes for companies looking to report their annual financial performance in the form called the 10-K. This document is a monster, and producing it is one of the biggest financial chores a company faces. It’s also the most comprehensive piece of fundamental data you’ll get as an investor.
Most companies are required to release their 10-K filings within 75 days from the end of their fiscal year. Some smaller companies, though, have 90 days to comply with the rules.
Due to the complexity of producing a 10-K, there can be a significant delay between the end of the calendar year and the time the report gets released.
The 10-K is kind of like a company’s annual review. The level of detail of the 10-K is exhaustive, and unless you know what you’re looking for, it’s easy to get lost in the hundreds of pages of tables and text.
That’s why fundamental analysts rarely curl up with a 10-K and read it from start to finish like a novel. They just know how to skip around in a 10-K and look for these key elements:
- Everything in the 10-Q, just for the whole year: All the data you get in the 10-Q for the quarter, you get for the year in the 10-K. That includes the financial statements and legal proceedings, but also, a more expanded MD&A where the management team explains more fully how the year progressed. The controls and procedures section may also be more fleshed out, because the 10-K has been checked over by the auditors.
- Changes in accounting and disagreements with accountants: You might not expect to see conflict and intrigue in a company’s financial report, but sometimes you can find it here. Companies and their accountants will state in this section whether or not they didn’t see eye to eye on financial reporting matters.
- Long-term financial data: Companies give you the financial results for the year that just ended. But you’ll also find data for the past three, five, or even ten years. These data are very useful when looking for trends, or changes in fundamentals like revenue and earnings.
- Business summary: Here, the company lays out the nitty-gritty of what it does for a living. The company may break down its major business units and even, in some cases, tell you which parts of the business are the most profitable.
- Risk factors: Imagine showing up to pick up a date, but before you leave for the movies, he or she sits you down with a huge list of everything that’s wrong with themselves. That should would save quite a bit of time. Yet that’s precisely what companies must do in their 10-Ks. If there’s a known factor that could impair a company’s fundamentals, it is required to tell you about it here.
- Auditor’s opinion: Close to the bottom of the 10-K, the accountants will need to sign off on the books to indicate they reasonably reflect the financial condition of the firm.
When reviewing a 10-K, always read the auditor’s opinion. The statement from the auditor can be telling. While an auditor may not wave a red flag and tell you not to buy stock, you can read between the lines. For instance, if you see the word qualified, watch out. That means the auditor has some issues with the way the books are kept, so you should too. Also, be careful when an auditor says a company may not be able to remain a going concern. That’s accounting talk for, “This company might not make it.”