How to read a 10-K annual report

The Form 10-K is the annual report that US public companies file with the Securities and Exchange Commission (SEC). It is the most complete, audited description of a business available to the public, and it is free to read on the SEC's EDGAR system. A 10-K can run to hundreds of pages, but you do not have to read it front to back. Knowing the structure lets you go straight to the parts that answer your questions.

When it is filed and who files it

A 10-K covers a company's fiscal year and is filed after year-end. The deadline depends on company size: generally 60 days after the fiscal year-end for large accelerated filers, 75 days for accelerated filers and 90 days for other companies. Its financial statements are audited, unlike quarterly reports. Do not confuse it with the glossy "annual report to shareholders", which companies may also publish, since the 10-K is the legal filing with the required disclosures.

The structure

The 10-K follows a fixed format of four parts divided into numbered Items, so you can find the same section in any company's filing.

A sensible reading order

1. Business (Item 1). Understand how the company earns money before looking at numbers. Look for segments, customer concentration and the competitive landscape.
2. MD&A (Item 7). Management explains why revenue and margins changed, how cash was used and what drives results. It often includes the discussion of critical accounting estimates, which shows where judgment can move reported profit.
3. Financial statements (Item 8). Read the income statement, balance sheet and cash flow statement together. Compare profit with cash flow, and look at several years to see trends.
4. Notes to the financial statements. This is where the detail lives (see below).
5. Risk Factors (Item 1A). Skim for what is new compared with last year, since changes in wording signal changes in concerns.
6. Legal proceedings and controls. Check for material lawsuits, restatements and any weaknesses in internal control.

The notes that matter most

• Revenue recognition. How and when sales are booked, which affects how reliable growth is. See revenue and revenue recognition.
• Segments. Profit and revenue by business line and geography.
• Debt and leases. Maturity dates, interest rates, covenants and obligations that may not look like debt on the balance sheet.
• Stock-based compensation and share count. The cost of equity awards and the dilution they cause. See stock-based compensation and dilution.
• Goodwill and intangibles. Large balances from acquisitions create impairment risk. See goodwill and intangible assets.
• Income taxes. Why the effective tax rate differs from the statutory rate.
• Commitments and contingencies. Pending litigation and guarantees.
• Subsequent events. Developments after the balance sheet date.

The auditor's report

Look for the audit opinion. A clean (unqualified) opinion is normal. Warning signs include an explanatory paragraph about doubt over the company's ability to continue as a going concern, an adverse opinion on internal controls, or a change of auditor. Newer audit reports also describe critical audit matters, which point to the judgments the auditor found hardest.

Example (illustrative numbers)

Suppose a company reports revenue up 20%, but the notes show receivables up 45%. The MD&A mentions extended payment terms for some large customers. This one cross-check, comparing a headline number with its supporting note, raises a question about the quality of that growth that the income statement alone would never show. The Beneish M-Score formalizes this kind of comparison.

Common mistakes

• Reading only the summary figures. The notes contain the details that qualify the headline.
• Taking management's framing at face value. MD&A is written by management. Check claims against the cash flow statement.
• Ignoring year-to-year changes. The change from last year in risk factors, accounting policies and segment definitions is often more informative than the text itself.
• Mixing up adjusted and reported numbers. Non-GAAP measures often appear in earnings releases, and if they appear in the 10-K they must be reconciled to GAAP. Do your own comparison.
• Treating a 10-K as a verdict. It tells you what happened and what management chose to disclose, not what will happen.

Where to see it on StocksXray

Each stock page includes a list of the company's SEC filings, so you can open the latest 10-K from the page. Reading filings is one step in a broader routine, covered in how to research a stock. For a sample page, see Apple.

Key takeaways

• The 10-K is the audited annual filing, organized into standard Items that make any company easy to navigate.
• Start with Business, then MD&A, then the statements and the notes, and read risk factors for what changed.
• The notes and the auditor's report contain many of the most useful warning signs.
• Compare headline numbers with their supporting detail, and use the 10-K together with the quarterly and event filings described in 10-Q, 8-K and proxy statements.