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The first part of an SEC report to look at is the 10-K report. This is a basic document that gives a full summary of a company’s performance. It is different from the report that a business gives to its shareholders in that the 10-K report does not provide any electoral processes.
This document is vital to understanding how a business works. It lets you see how the company is running and its various holdings and details. The comprehensive information is valuable. In fact, the 10-K report is the one thing that you should analyze above all others when looking at the SEC report. It showcases the basics you need to know to make your investment worthwhile.
Summary of Operations
The first point in the 10-K report to look at involves the summary of operations. This includes:
The business’ background provides information about what it does. For instance, the 10-k report for Apple (NASDAQ: AAPL) states that the technology company focuses on making consumer products like software, networking items, media players, and more.
The strategy includes how the business is moving forward. In Apple’s case, the strategy is designing new products and services within the company’s own tech platform. This includes working with an extensive assortment of third-party development programs among other features.
The offerings must include both the physical and non-physical items a company has. Apple’s 10-k report has details on the various products it has to offer like the iPhone and iPad. It also reports on services and software programs like the iOS operating system software and the iCloud cloud storage service. General services provided. The 10-k report also provides details on what a company is providing outside of its products. Apple’s 10-k report says that it offers an extensive customer service team located in the United States along with a few other call centers in different parts of the world.
The 10-k report does not have to specifically name any particular competitors. It should still include information on how other parties in the same field might offer certain products or services. Information on what a company is doing to try and make itself competitive or distinct from others could be found in the report as well.
The research and development section should include what a business is doing to find new products and make them available. Information on how much money a company is spending on R&D functions can be included. Apple’s 10-k report shows that it spent almost twice as much on R&D operations in 2013 as what it spent in 2011.
Any new applications for these legal markers can be included. This shows how committed a company is to what it is offering and that it is prepared for any legal issues that might occur. You could benefit from investing in a company that cares about its efforts. Do not expect this section to be overly detailed. The company only has to list how it is acquiring legal protection to cover any applications that were sent out regardless of whether they have been fully accepted or not.
The foreign data refers to its operations outside of its base country. Apple lists in its 10-k report that it has outsourcing partners around Asia as well as a few other groups around North America and Europe. Apple lists this to let people know that the company has a foreign presence both for where it sells items and where its products are made.
The seasonality report has details on when a company does much of its business. Apple says that a large portion of its sales occurs during the first quarter of that business’ operation. This is around the Christmas season when Apple sells a large number of products that are intended to be gifts.
You can use this point in the 10-k report to strategize when you want to invest. You might have more luck investing in Apple during that company’s first quarter because it is a time when the business is growing and thriving.
Financial Outlook Information
The next part of the 10-k report involves the financial approaches that a company is using. The financial data should be listed under a section that reads “Selected Financial Data.” The information can include the following:
The financial information should include historic points as well. Take the 10-k report that Intel (NASDAQ: INTC) has released to the public. This includes information on the net revenue for the company from 2007 to 2016. The report shows that Intel had nearly $60 billion in revenue in 2016. That total was $35 billion in 2009 increasing to $52 billion in 2013. Getting historic information is important to understanding how well a business is developing and how its finances have changed. The financial outlook must be as thorough as possible to know whether or not something is a suitable choice for your investment.
Balance Sheet
The next section of the 10-k report is the balance sheet. This should be listed near the “Financial Statements and Supplementary Data” section of the report. The sheet must include the following information:
These can include short and long-term assets. Such assets can include cash, inventory, accounts receivable, and other investments. Any equipment or properties that a business holds should also be included.
Short-term liabilities are orders that might be coming occurring right now. Customer advances, accounts payable, and any taxes or interest that a business owes should be included. Long-term liabilities are debts. These include debts for bonds payable or any lengthy loans that have to be paid off. The short and long-term debts should be divided into their own sections in this listing of information.
This refers to the assets minus the liabilities. It is a basic measurement of how healthy a company is. The total focuses on what might be returned to shareholders in the event that the company’s assets were liquidated and its debts were paid off. A business whose equity total is increasing is always worth investing in as that company stock has a better chance to increase in value.
This section should include information on both the preferred and current stock that is associated with a company. Preferred stock is for those who get more dividends and might have more access to certain company assets. Common stock includes voting rights for major decisions that a business will make. (Note: A majority of the stocks you will find on the market are common stock; preferred stock typically is offered to people within a business).
These three points are vital to be included on the balance sheet. There are a few strategies you can use to help you make a decision whether or not to make an investment in a company:
Looking at the current assets helps you discover why a business’ finances might have changed in recent time and if there has been a significant influx of sales or contracts.
Intangible assets include the general reputation and goodwill that a business holds. A company like Intel or Apple might have a significant amount of goodwill because they have been producing various products for many people and each has devoted fan bases.
The depreciation here refers to the times when the investment shrinks in value. Physical equipment or goods can depreciate over time causing the total value of assets to decline.
Some long-term debts could include loans that might exist for ten years or more. Others might expire in a year, thus giving a business a bit of freedom for what it can handle from an investment standpoint.
The debt ratio can be utilized to help you figure out how much an investment is worth. Take the total debt and divide it by the total assets. For instance, a business with $15 million in debts might have $25 million in assets. The debt ratio here would be 0.6. That is, the assets clearly outweigh the debts.
What if those numbers were reversed? A business with $25 million in debt and $15 million in assets would have a debt ratio of 1.666.
A business with a greater debt ratio will surely be dangerous to consider investing in. This type of business would be in real trouble because it does not have enough assets. You should still look at why the business attained so many debts just to discover what is going on in the business.
Income Statement
The income statement is a good document to read when deciding on your strategy for investing. The income statement refers to the data that covers what a business is earning over time.
The statement should include information for at least the last three years of business. Anything more with background data helps to give you a clearer idea of where a business is going and if it has had any new expenses over the years.
The income statement should include the following details:
The difference between these two points is the gross profit or gross loss.
These expenses may include research and development, general administrative costs, and any possible non-recurring expenses.
Subtract the operating expenses from the gross profit to get the total operating income or loss.
This income is what a company earns before interest and taxes.
Depreciation costs may be included in this section or at least documented on a separate line.
Subtract the interest and tax from the income to determine the net income.
Focus your strategies on businesses that are earning enough income versus the expenses it has. Taxes might be higher in value as a company makes more money, but that is just a natural progression of how a business develops. The tax expenses might vary based on where a company is incorporated. This might influence the report as a business might be in some part of the world where taxes are minimal or nonexistent. The 10-k report should tell you at the start if the business is incorporated in some place outside of where it is based so you at least know why tax expenses might not be significant.
Cash Flow Report
The cash flow report is an analysis of the cash flow, a measurement of how much money is being moved in and out of a business. It is a symbol of liquidity as it measures how well a business can keep its operations afloat. It lets you know if a business is making the right choices to pay off debts, managing its inventory, or even its R&D functions.
The cash flow report offers more information on what is happening in a business than an income statement. The problem with an income statement is that it just focuses on cash-related items. The cash flow report incorporates every asset and feature in the statement giving you a better idea of what a business’ assets and position are in reality. That does not mean you should ignore the income statement; both of these statements are critical to understanding if you should invest or not.
The cash flow report should include:
The cash flow refers to the money that has spent over a period of time or what that business has earned. This may include details on sales from credit, expenses for paying creditors, and so forth. A cash flow report should include specific reasons why the cash flow is where it is. This could include increases in accounts payable and decreases in accounts receivable.
Naturally, you will want to consider a company that has a slightly larger cash flow. There are times when a company might have a negative cash flow as more money is moving out of the business.
The cash that was used to sell or buy significant assets can be listed here. It could include details on equipment, machines, furniture, securities, insurance plans, or anything else being used at a time. A business that spends more on its investments might have a lower cash flow, but that business is also aiming to grow. Those new investments may be used for future profits and to make things within a business a more productive or otherwise proficient.
Some companies will spend more money on investments or at least reserve some of their funds for future use. This is especially the case for tech stocks. Tech companies often reserve massive amounts of money for possible innovations or for any anticipated future demands that they anticipate happening.
The money received from or paid to creditors and investors should be listed. The sales of stocks or bonds may be included. Dividend stocks should list details on how dividends were paid out. Some companies might buy back their stocks if necessary.
This section of the 10-k report is vital in that it focuses heavily on how the business could grow. There are many factors that will directly cause a stock’s cash flow to increase:
A decrease in the cash flow could occur due to a variety of issues:
This is only a small listing of the decreases and increases that you might come across when searching for an investment.
There are a few extra tips to use when looking at a cash flow report:
When the money is from operations, it suggests that the company is generating enough business and that it can acquire more inventory or new pieces of equipment. A company that has less than half of its cash coming from operations might be too risky to invest in.
A business with a negative cash flow might be in the middle of an expansion project. This means that the business is trying to grow and needs to spend extra to handle the expansion. See what has caused the flow to decline.
Loans can be arranged for years before they are due. Sometimes a loan might be paid off sooner. Review how the loans are being paid and for how long.
To understand the importance of cash flow, you need to look at the example of WorldCom. The company’s stock fell apart in the 2000s in dramatic fashion. Many people saw WorldCom had a sizable amount of income growth, but they did not pay attention to the cash flow. What the investors did not know was that WorldCom had a very poor cash flow and was significantly smaller than the net income. WorldCom was not investing and had been losing money in spite of all their income growth. Any investor who noticed that WorldCom’s cash flow was poor could have made the smart move and decide not to actually invest in the stock. Considering how WorldCom fell apart, staying away would have surely been the best bet.
Legal Proceedings
The legal proceedings of a report are vital to analyze. This refers to the lawsuits or other complicated court proceedings that a business is experiencing. These are events that are outside standard litigation.
Let’s go back to the Apple 10-k report. Apple reported information on a few legal cases it experienced in its 2013 report. It included information on Apple losing nearly $370 million in a 2010 case against a company that claimed Apple infringed upon certain patents. A 2012 case where Apple was rewarded about $1 billion from another suit was also included.
The legal proceedings section should include details on the official names of the court cases involved and how much money they were worth regardless of who the court favored. Information on why litigation was instigated should be included as well.
You might want to look for additional information on any legal proceedings of a company by researching the cases on the websites of the groups that heard those cases. For instance, a case heard by the United States Department of Justice can be researched online at www.justice.gov. You would have to go to www.uscourts.gov to get additional information on cases held within certain districts in the United States. These sites will give you full information on court proceedings and the background data surrounding those cases.
A company should be straightforward and direct about its legal proceedings in this part of a 10-k report. A company that is willing to give as much information on these proceedings as possible is always easier to trust because that company is not afraid to acknowledge some of the concerns it might have. You should still look at those outside websites as a business might still try to hide information of its legal issues.
Risk Factors
The 10-k report identifies the risk factors that a business faces. These factors include concerns that a business feels will directly impact its future earnings. Think of it as the W part of a SWOT analysis.
Intel’s 10-k report lists numerous risk factors that could hurt the business. The report reveals how it is difficult for the company to predict the demand for its products. It also mentions how Intel faces a sizable competition and is also subjected to many variables in international markets that could directly make a difference in how well the company is able to earn revenue and keep itself operational.
The risks listed here can include both problems relating to the outside market and also within the business itself. Intel states that it is at risk of product defects or errors that might impact its products. This risk could result in recalls or significant expenses, not to mention the potential for Intel’s reputation to be damaged.
All of these points on the 10-k report are vital for you to analyze when deciding in what stocks you should invest. Check the entire report before you execute a trade so you understand where a business is going and how it might potentially change in value.
