How to read a company's annual(10-K) report?

This week, Apple released its fourth quarter result (10-Q) and the subsequent annual report(10-K).

Compared with quarterly reports, annual reports contain longer-term data, and delve deep into every aspect of the company's situation. Warren Buffett has said he loves to curl up with companies' annual reports.

If an investor finds out a new company and want to know if its stock is worth investing in, the first step recommended is usually to read through its annual reports for the past three or five years, which will give you a comprehensive understanding of the company.

As a result, reading a 10-K is an incredibly crucial step you must take to become a better investor.

The 10-K annual report is often lengthy, detailed, and filled with a plethora of information. For a novice investor, It's best to focus on the following five distinct sections.

The business section remains one of the most important parts of the 10-K.

It gives a summary of the business's core operations, including its goods and services (i.e., how it makes money).

Take Apple as an example, information we will find in the business section include:

This lists all the risks that the business is currently facing or may encounter in the future. The risks are typically listed in order of importance.

These risks might be related to finances, strategy, technology, or even competition.

This section provides specific financial data regarding the business for the previous five years. You can get a decent idea of revenues, earnings growth, operating costs, and debt management from the chosen financial data.

Although we don't need to go into great detail, this section provides a solid overview of the business and a foundation from which we may build. For instance, if revenue growth falters one year, take note of it and try to figure out why.

After the "chosen financial facts" section, we now enter the meat of the 10-K. Some of the most crucial data is found in the management's discussion and analysis, or MD&A, section of the 10-K.

This section is where the company can tell its story in its own words. Investors could get insight into what drove the success or failure of the company during the year.

We should pay particular attention to the sections of the MD&A where management discusses any economics and the operating outcomes for the last three years. We must also concentrate on any estimates or assumptions made by management and how they affect the financials.

This covers various financial statements and any other information, usually spanning a three-year period.

The three financial statements you should pay particular attention to are as follows: