A 10-K report is an annual report that public companies must send to the Securities and Exchange Commission for review. It contains information about the company that an investor would need to or like to know. Free to the public for perusal, a 10-K report is filled with corporate and legal jargon that usually makes it difficult for lay people to get through. It is necessary for an investor or potential investor to read the document carefully to discover the actual financial condition of the company.
Instructions
1. Read the business description. This is item No. 1 of the 10-K report of any company. The first step is to read the description of the business given here, which is important to understand the kind of business undertaken by a particular company. This step makes it easy to determine whether you should read the rest of the 10-K report. If you understand the company's business, its customers and business ideologies, and this appeal to you, move on to the rest of the report.
2. Analyze the risk factors. This appears as item No. 1-A in the report and mentions and explains risks that a company may have, such as risks common to the sort of business that being operated to the company. For example, a company that specializes in selling exotic fruits can come under the risks of economic conditions of the country from which it is importing food. Read the risks carefully to ensure that they are common to the type of business. Make sure that you are prepared to handle the risks before investing. Most companies list out every detail to save themselves from court cases in the event of any risk actually taking place.
3. Interpret legal proceedings given under item No. 3. Almost all pending and resolved legal proceedings will be explained in this section. Look at significant and unusual lawsuits against a company and not one that is a regular legal proceeding. For example, a large company specializing in cosmetics may have a $10 million lawsuit against it for having sold a product that caused an allergic reaction to a person. While you keep in mind the case, know that it is routine to the business and does not change the balance sheet from being in its favor.
4. Analyze and compare the financial data as given under Nos. 6 and 7 of the report. This reports annual fiscal performance. Compare the cash flow statement from the previous year and the current year and check whether there has been more of a revenue rather than expenditure. Compare the income statement with the cash flow statement to check for inconsistencies.
5. Examine the auditor's opinion. This is at the end of the 10-K report and is one vital sign of how the company is going to fare. The auditor here subtly mentions whether the company is worth investing in or if it will be a source of trouble.
6. Comprehend the "Management's Discussion and Analysis of Financial Condition and Results of Operations." In this section, the management discusses change in the financial status of the company and the reasons and factors that affected the change. Towards the end of the section, the "Liquidity and Capital Resources" section will determine how the company seeks to raise funds for the future.
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