The 10-K
This is the first post in the Annual Report (10-K) Series. The goal is to work through a 10-K together so we can use this new resource to help value companies.
An annual report is filed yearly (unless there is a change in Fiscal Year, but we'll talk about that a different time) by each and every public company. This is a requirement by the SEC. The 10-K has a very specific breakdown which we will discuss below. Before looking at the breakdown I want to address two (2) questions:
- Why would we want to use the 10-K to value companies in the first place?
- If 10-K's are filed annually then aren't they often "out of date"?
Why Would we want to use the 10-K to Value Companies
First appealing part of the 10-K is that the 10-K is jam-packed with juicy financial information. This is information we can only get from the company directly and can only get in one of their required filings. There are other financial filings like the 10-Q (we will mention that briefly in the next section) but the 10-K is the only document with a years worth of this data.
Another really important reason to use the 10-K is that since it's required by the SEC there are laws pertaining to how the companies must file their financials which in turn prevents misleading investors. This gives us (as the investors) a sense of security.
Piggy-backing off the fact that there are laws pertaining to how the companies must file, we gain another advantage: consistency. Since all companies are required to include the same information, we can compare the information across companies and through time.
To see why this can be so beneficial, imagine two companies tell you they have 1 million dollars of cash on hand. Knowing how much cash a company has is certainly an interesting piece of information. Without any reliable, legally binding source, all you can do is take each company at its word. Without any additional information, you might assume that each company is worth the 1 million dollars they claimed they had. Suppose you wanted to buy either business. If you were to only go based on the information they provided, you would (in theory) gladly pay 1 million dollars for the cash each company has. While "Cash is King", what happens if you learn that Company A has 1/2 a million dollars in debt, whereas Company B is clean of any liabilities (meaning no debt). Clearly, all else equal, Company B is the better buy. Without this last (key) bit of information (total liabilities), investors cannot make informed decisions about the companies they seek to purchase.
This is where the standardization of these financial documents comes in handy. Companies are required to file according to what is known as GAAP accounting standard. More on this later, but in short it guarantees we know how companies are coming up with the numbers they are reporting (at least to some extent).
If 10-K's are Filed Annually then Aren't they Often "Out of Date"?
This is a good point. A year may sound like a long time and a 10-K is not exactly what you'd want to base investing off of if you were a short term investor but as a long term investor, 1 year is shorter than you think. Of course, lots can happen in a year, and staying up to date with the companies we are investigating is crucial, but the financials from last year are still extremely relevant to this year.
For more up-to-date financials we can look at the companies 10-Q. A 10-Q is like a 10-K but instead of being filed annually, it's filed quarterly. That means we get 3 10-Q's a year + 1 10-K.
Although in this series we focus on a 10-K, 10-Q's are as valuable for the financial statements section of this series. There are additional parts of a 10-K which we find useful as well that do not appear in 10-Q's. For this reason we focus on 10-K's but this knowledge carries directly over into 10-Q territory.
Alright. With those 2 questions aside, let's get our materials. To follow along with this series I suggest downloading Boeing's (NYSE: BA) 2019 10-K (in a moment I will walk you through where to find it, so hang tight). I chose BA because the coronavirus pandemic happened in 2020 and it would be interesting to review Boeings 10-K to see how well positioned they were. Can we feel confident they won't go bankrupt?
Finding a Companies 10-K
There are 2 ways I feel confident finding a companies 10-K:
- Directly from the companies investor site
- From the SEC
I'll add a small disclaimer here. Up until now, I've more or less used "Annual Report" and "10-K" synonymously. This is sort of true.
On the investors site you'll tend to find the Annual Report. It usually is more "put together" then the raw SEC filed 10-K. Both documents contain the relevant financial information, the annual report just maybe displayed in a prettier fashion.
Investor Site
Most (all?) companies have an investor site. For Apple (AAPL) it is: investor.apple.com. For Boeing (BA) it is: investors.boeing.com. A quick Google search can usually point you in the right direction. Once you get on the investor site there's no real trick to finding the 10-K. Each company lays out their sites in their own way. My suggestion is you look for "financial statements" or something along those lines. In Boeing's case there is a "Financial Reports" section investors.boeing.com/investors/financial-reports.
SEC
I suggest getting the 10-K from the SEC directly. My main reason is that the styling of the report is relatively consistent across different companies and because it doesn't require finding different companies investor sites and navigating them.
To get a 10-K from the SEC we can head over to their search website: https://www.sec.gov/edgar/search.
From here there is an option to search by Ticker. Boeing's ticker is BA so go ahead and put that into the "Company name, ticker, CIK number or individual's name" search box.
Make sure that "Filing category" is set to: "All annual, quarterly, and current reports".
The first 10-K in the list is the most recent one. If want to filter to show 10-K's only click the "Form" button on the left side and check the 10-K box.
We will be looking BA's 2019 10-K so go ahead and select that one or click this here. Just keep in mind the 2019 10-K was filed in 2020. Make sure you select the one with a 2019 "Reporting for" date.
For now I suggest opening the link and scrolling around. Next post we will break down the different sections.
[Edited by: Elliot Eisenberg] 🙏