Company annual reports or 10K’s are crucial to understanding the financials of a company. If you want to be confident in investing into single companies instead of ETFs, reading 10K is going to be your bread and butter and the difference between making and losing money.

How do you find a 10K online?

So let’s first understand how to find a 10K.

First you want to go to the SEC website. From there you can search any company by name or ticker symbol.  I’m going to look up Apple as an example. In the right hand side of the website, you will see several different reports from Apple including 10K, 10Q, proxy materials, etc. For this guide we are going to look at 10K’s so click on the latest 10K from Apple.

Ok you got your 10K pull up, now what?

Well, we have to understand what to look for since these documents can sometimes be hundreds of pages long.

Don’t worry I’ll tell you exactly what to look for. In a nutshell, you’ll want to look at the business overall and then the consolidated financials to get a quick run down of the company.

First look at the business overall.

How do they make money? What industry are they in? What risk factors do they face?

These are all questions which try to understand if there is a business moat or not.

So what is a moat?

A moat is just a sustainable competitive advantage. It could be brand loyalty or cost advantages. For example I would argue Apple has a moat due to brand loyalty and user base.  Skimming the business section for this information is important to understand potential headwinds as well as tailwinds that could be helpful in the coming quarters.

So let’s say the moat checks out, it’s time to look at the numbers. 

You might not know what these numbers are so make sure you check out our ever-expanding knowledge base.

You’ll notice that numbers build on one another.  The absolute top line number is revenue from selling goods and services. You want to see revenue go up over time as the business sells more to the addressable market.  Taking out the expenses from selling and operations, leaves you with operating income or the earnings before interest and taxes. Which lets you know how efficient a company’s operations are.

Taking out the taxes from the operating income you get net income and this can tell you the bottom line numbers for the company.  Oftentimes you will see a comprehensive income statement as well which takes into account changes in foreign currency, derivatives, and debt securities. You want to make sure the main numbers such as revenue and net income are increasing year over year, and if they are not, then you need to find out why.

Next up is the balance sheet

The balance sheet is a snapshot into the current condition of the company. Here you will see Assets and Liabilities, and obviously, you want to see a larger number for assets versus liabilities. 

But there is also a distinction between current and non-current where non-current means those assets or liabilities won’t be converted to cash or due within a year.  In this section you should also note if capital expenditures and loan debt is increasing or not year over year. Usually if they are allocating capital towards something that will bring in more revenue over time this is not a concern.

Let’s move on to the shareholder equity part

This section is super important to value investors as you can see dividend payouts, stock buybacks, and stock-based compensation numbers all of which can play a huge role in stock price.  Ideally you want to see some form of stock repurchase and/or dividend to indicate strong faith in the company from the leadership.

Finally maybe the most important part is the cash flow statement

This part is almost a summary of the other sections. You can understand the cash generated and used in each part of the business: operations, investing and financing.  Ultimately you are looking for an increase in the cash and cash equivalents held at the end of their fiscal year.

Conclusion

And that’s it! I hope this has given you more insight on 10-K’s. I may do a video breaking down each section even more for a line-by-line look at the financial sections of the report, so make sure you subscribe to my YouTube channel here at Stocks With Ajay.  It seems daunting at first with all these numbers and definitions, but it’s critical to understand so you can make money in these markets!