How to Read a 10K

Because it is such an important document and actually released by the company itself, investors should be aware that the information on the 10K is presented in a manner that is most advantageous for the company without violating Securities and Exchange Commission (SEC) regulations.

Unfortunately, many investors are still unsure of how to read an earnings report or how to read a 10K. While the reports are prepared by companies without the intent to deceive investors about company health outright, investors should still take the information found in them with a grain of salt. Reading between the lines to decipher a company's true financial condition is the key to understanding earnings reports.

Earnings Report Vs. 10Q Filing
Companies are legally required to file a quarterly report, an annual report and the 10-K with the SEC. The 10Q contains financial information such as the income statement, balance sheet and the stockholders' deficit and cash flows. It also has management's analysis of the company’s financial conditions, disclosures of market risks facing the company, and notes about controls and legal proceedings. Large companies might have 10Q documents longer than 100 pages.

Companies typically post a press release summarizing what is found in the 10Q. The press release often contains nothing more than a few paragraphs of information and a statement from executives that outlines some of the key elements of interest to investors including revenue, net income, cash flow, earnings per share, and EBIT.

The Form 10Q, however, is the black and white, no-frills document that is submitted to the SEC. Albeit more boring and a lot longer than the earnings press release, the 10Q carries more significance for investors, because it contains a wealth of information that cannot be glossed over. While elements of the earnings report can fall into the realm of marketing material, companies releasing them cannot fudge the numbers without the risk of raising red flags.

The Components of an Earnings Report
For a quick snapshot of the major tenets of what's going on with a company, reading the earnings press release is a good start. Investors who are interested in buying shares in a public company and want to make an informed decision should examine the 10Q filing. It is important to note that the financial statements are not audited.

The components of a company’s filings are as follows:

10K

Part I

  • Item 1: Description of Business
  • Item 1A: Risk Factor
  • Item 1B: Unresolved Staff Comments
  • Item 2: Description of Properties
  • Item 3: Legal Proceedings
  • Item 4: No Required Info/Additional Info

Part II

  • Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  • Item 6: Selected Financial Data
  • Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
  • Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  • Item 8: Financial Statements and Supplementary Data
  • Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  • Item 9A: Controls and Procedures
  • Item 9B: Other Information
Part III

  • Item 10: Directors, Executive Officers and Corporate Governance
  • Item 11: Executive Compensation
  • Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  • Item 13: Certain Relationships and Related Transactions, and Director Independence
  • Item 14: Principal Accounting Fees and Services

Part IV

  • Item 15: Exhibits, Financial Statement Schedules Signatures
10Q

Part I: Financial Information

  • Item 1: Condensed Consolidated Financial Information
  • Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
  • Item 3: Quantitative and Qualitative Disclosures About Market Risk
  • Item 4: Controls and Procedures

Part II: Other Information

  • Item 1: Legal Proceedings
  • Item 1A: Risk Factors
  • Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
  • Item 3: Defaults Upon Senior Securities
  • Item 4: (Removed and Reserved)
  • Item 5: Other Information
  • Item 6: Exhibits