How should you read a 10-K annual report?

A 10-K is long because it has to be complete. The good news is that its structure is fixed by the SEC’s form, so the same reading order works for every company. This routine follows the approach in the SEC’s “How to Read a 10-K” guide and adds the checks that tend to surface the most information per minute.

Before you start: get the right document

Open the company’s EDGAR filing list and choose the latest filing with form type 10-K, not an 8-K earnings release and not the glossy annual report. Check whether a 10-K/A followed it. Note the fiscal year end on the cover page; many companies’ fiscal years do not end in December. Our company pages show each company’s fiscal year end and its most recent 10-K.

Most 10-Ks are now filed in Inline XBRL, so the HTML document you read in a browser also carries machine-readable tags for the financial data. You do not need to use the tags to read the report, but they are why financial data can be extracted automatically.

Minutes 1 to 5: Item 1, Business

Item 1 explains what the company sells, its segments, customers, competition, seasonality, regulation and human capital. Read it even for a company you think you know. Look for:

• Segments and how the company describes each one; segment reporting in the notes will follow this structure.
• Customer concentration, where a single customer accounts for a large share of revenue.
• Seasonality, which affects how to compare quarters.

Minutes 5 to 10: Item 1A, Risk Factors

Risk factors are written by the company’s lawyers and can be long and generic. Skim the headings, which the SEC requires to be descriptive, and stop on risks that are specific to this company. A useful trick is to compare the list with the prior year’s 10-K: new risk factors, and those that moved up the list, reflect what changed. Item 1C, added for fiscal years ending on or after December 15, 2023, describes cybersecurity risk management and governance.

Minutes 10 to 18: Item 7, Management’s Discussion and Analysis

MD&A is where management explains the numbers. It usually opens with an overview, then compares results year over year, then covers liquidity and capital resources, and ends with critical accounting estimates. Read it with the income statement open. Every large movement in revenue, margins or expenses should have an explanation here. Pay attention to:

• Liquidity and capital resources: cash, available credit, debt maturities, and planned capital spending.
• Critical accounting estimates: the judgments that most affect reported results, such as revenue recognition, impairment testing or reserves.
• Non-GAAP measures, if used, and their reconciliation to GAAP figures.

Minutes 18 to 26: Item 8, Financial Statements and Notes

Start with the auditor’s report. Confirm the opinion is unqualified and read any critical audit matters, which point to the areas the auditor found most judgment-heavy. Then scan the four primary statements: balance sheet, income statement, statement of cash flows and statement of shareholders’ equity.

The SEC’s beginners’ guide to financial statements suggests paying particular attention to the cash flow statement, because it shows whether reported earnings convert into cash. Compare net income with cash from operating activities over several years.

The notes are where details live. Prioritize the notes on revenue, segments, debt, leases, income taxes, commitments and contingencies, and subsequent events.

Minutes 26 to 30: Controls, exhibits and Part III

Item 9A reports management’s conclusion on disclosure controls and internal control over financial reporting. A material weakness is disclosed here and is worth noting. For larger companies, the auditor also gives an opinion on internal control.

Item 9B includes other information, such as Rule 10b5-1 trading arrangements adopted or terminated by directors and officers during the fourth quarter.

Part III (Items 10 to 14) often says the information is incorporated by reference from the proxy statement, which you will find on EDGAR as a DEF 14A filed later.

Item 15 lists the exhibits, including material contracts, subsidiaries (Exhibit 21) and the officers’ certifications (Exhibits 31 and 32).

Questions to answer at the end

1. How does the company make money, and which segment matters most?
2. What changed this year, in results and in risks?
3. Do operating cash flows support reported earnings?
4. When does significant debt mature, and how will it be paid?
5. Did the auditor flag any critical audit matters, and are controls effective?

If you can answer those five, you have read the 10-K. For the quarter-to-quarter view, follow up with the 10-Qs filed since, and watch the filings docket for 8-Ks that change the picture.