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Reading a 10-K

Table of Contents

Introduction

10-K is short for form 10-K. It's a document the SEC requires all public companies to file each year. It presents a financial picture of the company, like assets, liabilities and revenue.

Lecture notes on reading a 10k

Key to making distinction between information and noise

  • Be focused
  • Reading cover to cover looking for interesting stuff never works.
  • Start with define items to find
  • Tie information to your valuation metrics/models

3 ways to value a company:

  • Intrinsic value or DCF Valuation
  • Relative valuation
  • Contingent claim valuation

Four groups to value a company

  • How much does it make from existing assets
  • Clues as to how it can grow in the future Running efficiently or potential for new investments
  • How long can it keep the growth going before it becomes mature
  • Risk: Operational & Financial

Key valuation questions

What you want to answer from the 10k?

Category Key questions Key Inputs
Cash from from existing investments 1. How much capital is invested in existing assets? 1. Current Revenues
  2. How much did hte firm earn on these assets? 2. Current Earnings
    3. Current capital invested
    (Debt + Equity - Cash
     
Future Growth 1. How much growth from new investments? 1. Revenue Growth
  2. How much growth from improved efficiency 2. Operating Margin
     
Quality of growth 1. How much new capital will teh frim have to 1. Reinvestment
  invest to deliver that growth 2. Return on invested capital
     
Operating Risk 1. What business does the firm operate in? 1. Relative risk (Beta)
  2. What countries does the firm operate in? 2. Equity Risk Premium
    3. Cost of Capital
     
Financial Risk 1. How much debt does the firm have? 1. Debt Ratio
  2. Are there any other contractual commitments? 2. Cost of debt
     
Other assets 1. Are there any operating assets? 1. Non operating assets
  2. Are there other claims on equity? 2. Minority interests
    3. Options outstading
     

Template for reading a financial disclosure

Timing & Currency

Period covered by financials, Reporting currency

Business mix

  • Business segment breakdown (revenues)
  • Geographic breakdown (revenues)
  • Specific risks

Base year inputs for valuation

Income statement

  • Revenues
  • Earnings
  • Interest exp
  • Tax rate

Balance sheet

  • Book equity
  • Debt outstanding
  • Cash & Working capital(WC)
  • Corss holdings (majority & minority)

Statement of cash flows

  • Change in WC
  • Capital Expenditures
  • Depreciation
  • Debt issues (repaid)

Follow through footnotes to financials

  • Operating lease
  • Rental & other commitments
  • Employee Options
  • Timing of debt due
  • Under funded obligations (pension & healthcare)

Share count

  • Number of shares outstanding
  • Restricted stock units (RSUs)
  • Acquisitions paid for with stock

Corporate Governance

  • Differences in voting rights across share classes
  • Special rights or privileges given to insiders etc.

Example of a valuation (P&G Sept 2012)

  • slides
  • 10k
  • Compute the effective tax rate: Taxes Paid / Earnings before taxes = 27.5%

Data sources