The Foundation of Business Acumen
A 10-K is a financial report that publicly traded companies are required to submit to the security exchange commission on an annual basis. This document is a great resource to understand how any company is performing, what's going on in the business, and look at its key metrics and measures.
Let's look at Costco as an example.
The easiest way to access a 10-K is to look for a company's annual filings. The 10-K refers specifically to the form that every company has to fill out as a part of their SEC filings. If you see 10-Q, those are quarterly versions of the report but 10K is the annual version.
First, there are 15 items within a 10-K. You have information about its business, risk factors, unresolved staff comments, properties, legal proceedings, all sorts of different items you can kind of look at. So there's a lot of information. If you look at Costco's 10-K, there are about 75 to 80 pages of information. Sometimes they're as big as 800 pages or more. That's a lot of information to sift through so how do you distill it to its most critical pieces?
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There are only three items we'll highlight.
Item 1: Business
Particularly if you're looking at a company you don't know very much about, always go to the business section. This is where the company reviews a little bit of its history, where it came from, then it jumps into the business itself. It looks at how the company breaks up revenue, for example by geography or by segmentation of the business, etc. In Costco's Item 1, you can see its core merchandise categories. It lists food and sundries, non-foods, fresh foods, as well as warehouse ancillary, things like gasoline, pharmacy, optical, etc. So it's a nice little review of the company itself.
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
If I know the company and I just want to see what's going on in the business, I typically will jump to Item 7. Now, this is probably the most important part of a 10-K. It's going to give you a bit of a review of the company itself, but eventually, you're going to get to a section where it talks about the company's financial performance like the results from the operations section.
Here you can determine what's happened in the business. For example, they'll show and explain why they may have increased or decreased in revenue. Highlight their profitability metrics like gross margin. Why did that go up or down? It shows you the numbers and it explains what it is you want to look at. Management Discussion Analysis is where to go to really see what's behind the numbers and really going on in the business.
Item 8: Financial Statements and Supplementary Data
This is where you find the financials themselves. Although in Item 7 you see little parts of the financials, here they are broken down in more detail. Item 8 will provide the audited income statement, balance sheet, and statement of cash flow. Here are its revenue and operating expenses and profitability numbers. Here you can answer the question of how financially strong is the company? What sort of risk is it taking? Look at its liabilities versus its assets and versus its equity etc. What is its cash position and where is it deploying it?
With that, we hope the 10-K is easier to navigate. It's a great resource for individuals to be able to understand their own company or customers as well as just being a knowledgeable investor. It allows you to contribute to business conversations, contribute to the strategy of the company, and align your role to the goals of the company.
What is Gross Margin?
From a leadership standpoint, gross margin is a simple but distinctive metric to help give value to their products. Are the products and services valuable? Is the price point fair? Does the company have an efficient pricing and cost structure? Is the company effective in the way their managing their costs, and selling their products and services? The higher the margin, the more effective the company's management is in generating revenue for each dollar of cost.
Continue your education with this financial glossary term:
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