When studying stocks, investors often come across a report called a 10-K. Many investors will find the design and appearance daunting. However, if one shows a willingness to dig into the details of the form, they can arm themselves with a lot of pertinent information needed to profit from a given stock.
What is a 10-K?
The 10-K is an annual report that the Securities and Exchange Commission (SEC) requires of all companies. It provides a broad, complete summary of a company’s annual financial performance.
Investors should not confuse a 10-K with the “annual report to shareholders.” Both serve as an annual report, but companies usually take a marketing-like approach to the annual report to shareholders.
These will include financial information as well as pertinent news about the company, its strategies, the plans for the future, and other noteworthy facts. The annual shareholders report from Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) has become well-known for gleaning information on Warren Buffett’s investment philosophy, for example.
The 10-K takes a more utilitarian approach. Companies write it purely to comply with SEC regulations.
The SEC requires that every 10-K form consists of four parts. Part 1 describes the business, as well as information such as risk factors and pending legal proceedings. Part 2 deals with company financials and the stock. This will include audited financial statements. It also provides information about the stock, forward-looking statements, and management discussion about the firm’s financials.
Part 3 reveals those who own at least 5% of the company. It also describes the executives and their compensation. Moreover, it will explain relationships and transactions, as well as information about accounting fees and services related to the creation of the 10-K. Part 4 deals with exhibits and financial statements schedules.
10-K disclosures
The requirement to file a 10-K does not necessarily hinge on existing as a public company. If the company maintains at least $10 million in assets and more than 2000 owners hold an equity stake in the company, that entity must file the 10-K.
Companies must provide the 10-K to any shareholder requesting a copy. The 10-K will also indicate whether the information is available free of charge on the company’s website. Most companies will post this information on the web. Even if the company does not, interested parties may find a company’s 10-K within the SEC’s EDGAR database.
Amending documents
Stockholders should also understand related documents. The 10-Q serves as the quarterly, less detailed version of the 10-K. It will include financial information for required quarterly filings. Unlike the 10-K, 10-Q information often remains unaudited. The SEC requires three 10-Q statements per year.
When the company reaches the end of the fiscal year, the data from the 10-Q appears in the 10-K. Hence, investors will not see a 10-K and a 10-Q filed in the same quarter.
Also, if companies witness a significant event in between filings, they must file an 8-K. Bankruptcies or departures of key executives are examples of events that would require an 8-K filing.
Final thoughts on the 10-K
Investors can gain much by learning how to read a 10-K form. Companies file this form to comply with SEC regulations. As such, they do not lay it out in a way that will appeal to most readers.
Still, while the layout may not please the eye, the information held within the form may. The form describes the firm itself, as well as a treasure trove of financial information, and management’s take on this data. It also includes details, both about the company’s largest owners, as well as its executive management team.
In it, readers may find interesting facts or infer information from the financials that other analysts either ignored or overlooked. When looking to invest money in a given stock, knowing how to read a 10-K can reduce the risk of losses and lead to more significant gains.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
