Everything You Need to Know About 10-K Statements
A successful investor understands the value of due diligence. While technical traders follow patterns of momentum and volatility, those with long term winning track records use fundamental analysis. Understanding comparative ratios, earnings growth and other financial details are what helps an investor know the real value of any stock they want to invest in.
Information about a publicly traded company is freely available to investors. It can be found by pouring through financial statements, such as the balance sheet, income statement and cash flow statement. This information is updated quarterly along with a plethora of other financial information including risk assessments, loans, acquisitions and other things. Investors that want a leg up on the competition can find it all on the 10-K statement (10-Q for quarterly statements) – easily found on the U.S. Securities and Exchange Commission website.
Reading a 10-Q/K
The first thing you’ll notice when opening a 10-K statement is that they are usually highly detailed and sometimes over 80 pages long. There’s all kinds of information available, but most investors don’t know what’s important or what parts to pay attention to.
One of the first things to notice on a 10-K is the company’s explanation of business operations, how it actually makes its money and what markets it currently operates in. This part is doubly important for investors who aren’t completely sure what a company does. For technology companies in particular, this information can help shed light on what type of business a company does and how it actually earns income.
The next part of a 10-K covers risk assessments and other potential liabilities, such as lawsuits. Believe it or not, investors often jump into a stock without reading these critical pieces of information, like pending bankruptcies or risk exposures, that might otherwise change their opinion.
The financial statements are arguably the part that most investors are familiar with. This section includes the balance sheet, income statement and cash flow statement. From these documents, investors can see how much money a company is making, how much debt it has and much more. This is also where most investors get comparative ratios, as well.
Due to accounting rules, many potential liabilities or obligations must be listed on the financial statements. But they still need to be disclosed to investors. Things like operating leases, where the company pays out a certain amount each month in rent, won’t reflect the true nature of the liability on a balance sheet.
Other items can be found on a 10-K as well, including forward-looking estimates from management and notes from an independent auditor. Investors can look for certain red-flag keywords, like “ongoing concerns” that can tell investors to stay far away from that company.
Companies that aren’t incorporated in the United States generally don’t have a 10-K available with the SEC. Investors interested in foreign stocks should take extra precautions, as accounting rules and other financial details may be different than those required in the United States. Certain industries tend to have specific details that are critical for them, but not for others, like the amount of reserves for a mining company. Investors need to understand the specifics of the type of industry a stock operates in before making a final decision.