Annual Reports, 10-Ks, and 10-Qs

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When you're analyzing a company to determine what you think it is worth, you must get your hands on the company's balance sheet, which typically means locating a copy of the firm's latest annual report, Form 10-K filing, and/or Form 10-Q filing. Each document serves a different purpose and offers different insights into the business.

The Annual Report

The annual report is a once-a-year publication released by companies several months after the end of their fiscal year. It includes almost everything an investor needs to know about the business.

The annual report is sent to shareholders in advance of the company's annual meeting. It also must be posted on the company's website.

An annual report usually contains a letter from the chief executive officer that discusses the past performance of the company as well as expectations for the upcoming year. Tucked away in the back of most annual reports is a collection of financial documents, footnotes, charts, and disclosures, all of which you would be wise to read as they can help you uncover a true picture of the firm.

You should be able to access a company's annual report—even if you're not an existing shareholder—by clicking on the Investor Relations link on the company's website. From there, you should be able to download the report in PDF form.

The Form 10-K Filing

The Form 10-K is an annual disclosure that publicly traded companies must file with the U.S. Securities and Exchange Commission following the close of their fiscal year. The size of a company's public float—the value of the company's common shares not held by affiliates of the company—determines how much time a company has to file its 10-K.

A company with a float of $700 million or more—a large accelerated filer—has 60 days. A company with a float of $75 million or more but less than $700 million—an accelerated filer—has 75 days. And a company with a float of less than $75 million—a non-accelerated filer—has 90 days.

Whereas the annual report is often a well-produced document with lots of photos, the 10-K has the everything-and-the-kitchen-sink data you can spend hours going through—everything from the geographic source of revenue to the maturity schedule of bonds the company has issued. 

Some investors find the 10-K impenetrable, but if you love finance and enjoy crunching numbers, it is invaluable. Truly complex businesses may have 10-Ks that run several hundred pages long.

Sometimes you may run into a company that has no financial statements or other disclosures in the Form 10-K but, instead, has a passage that reads something along the lines of "incorporated herein by reference." This means that the information has been released elsewhere, such as in the annual report, and you need to look elsewhere for the data you need.

The Form 10-Q Filing

The Form 10-Q is similar to the Form 10-K except that it is filed quarterly, after the end of the first three quarters of the fiscal year. (The 10-K covers both the fourth quarter and the entire year.) Large accelerated filers and accelerated filers have 40 days to release their 10-Qs. Non-accelerated filers have 45 days.

The 10-Q contains a lot less detail than the 10-K due to the abbreviated nature of the measurement period, among other things, but it can be particularly useful from time to time, under certain circumstances. 

Specifically, the Form 10-Q can give insight into changes that are happening in a business long before those changes show up in the earnings figures. For instance, you might see that inventory turnover is getting better or worse or that accounts receivable turnover is improving or flashing warning signs that there may be a credit problem with customers. You could notice changes in working capital or learn about lawsuits and potential legal risks for which reserves haven't been established.

Publicly traded companies must also file a Form 8-K to inform the SEC and shareholders of any event that could affect the price of their stock.

The Benefits of Going to the Source 

You can get data from 10-Qs and 10-Ks from financial portals such as MarketWatch or Yahoo! Finance, but it's better to go directly to the company itself. For one thing, errors can creep into data that's been carried over to a different source.

For another, financial summaries are too limited in scope. It's still important to read the annual report, 10-K, or 10-Q yourself because there are all sorts of things that may not be included in these convenient reproductions. 

Let's consider the story of AIG prior to the Great Recession of 2008-09, when it got a huge government bailout. If you had carefully read the annual report, you would have been terrified of the derivative exposure, which didn't show up on financial sites, where all you saw were booming net income, growing assets, and expanding cash flow.

You must never forget that you are buying ownership in a business, in the case of stock investors, or lending money to a business, in the case of bond investors. There are no shortcuts. You have to do the work and understand the risk you are taking on to collect those dividends and interest payments.

Requesting Competitors' Reports, 10-Ks, and 10-Qs

Be sure to request the annual reports, 10-Ks, and 10-Qs of a company's competitors if you want to understand its strengths and weaknesses compared to other firms in its sector or industry. For example, it can help you understand an oil major better if you are studying all of the oil majors at the same time. You can analyze the financial statements and ask yourself, "What's different?" 

You'll discover how firms have different capital structures. You'll be able to scrutinize the DuPont ROE variables and see what is driving returns. You might be able to gain insight into which firms will come out on top by looking at things like the trend in sales per square foot and interest coverage ratios.

If one business explains a new accounting rule that is going to substantially change results reporting and another only glosses over it, that should raise red flags in your mind about the latter firm. Likewise, one company may point out a compelling opportunity the industry is facing, while a more conservative firm doesn't report on anything other than the results produced during the latest period. The former company would seem to be the better investment opportunity.