In this first module, I’m going to familiarize you with the information contained in your typical annual filing.
This is an example of a public filing.
Private companies don’t typically have quite as much disclosure “stuffed” into their annual reports,
but the financial statements will look very similar if they are prepared under generally accepted accounting principles or GAAP for short.
So let’s begin by picking a company.
I’ll pick Home Deport for no particular reason other than it’s a company that hopefully everyone is some familiarity with.
So as a first step, let’s go to the SEC website and track down the 10-k. The SEC website is www.sec.gov. And here we are at the SEC.
If you want to find, they would be located under EDGAR, and to search for company filings, we can click here...
Which brings up this screen. Now we want to find the filing for the Home Depot.
[typing in the Home Depot]
Ta-da!!!! We see all the filings Home Depot has made...Whoa, there is a lot of stuff here!
The 10-K is what we are looking for.
10-q is the quarterly filing, The 8-K’s are your news releases
All the other filings are fairly self explanatory and serve purposes beyond what we are interested in learning during this course.
To narrow our focus, we can type in 10-K in this search box and we can see their annual filings are summarized here.
Now this is there last filing for their year ended January 30th, 2012,
but I know Home Depot has already released their 2012 results, but here it is a few weeks later, and the 10-K has yet to be posted on EDGAR.
For our purposes, we will just go ahead and use the 2011 results. To get the latest greatest results, we would have to go to the press release
or the investors website, or we could just as easily look at their last quarterly filing for the most up to date results.
So the first item to note is that there is a time lag between when the company reports earnings in a press release and
when they file their statements with the regulator.
In the United States, this can be several weeks.
In Canada, this tends to be a day or two before they show up on SEDAR. We will click the 10-K document to open it up.
Let’s start by looking at the table of contents. In Canada, this information will be spread between the financial statements, the MD&A, and the AIF
Under Item 1 we have a description of the business. This is good for content if you are unfamiliar with the company and its activities.
Under Item 1A we identify the risk factors for the company. Now as a CFO and Director, I actually spend more time here than most analysts might.
My concern is ensuring that all the risks inherent in the company have been adequately disclosed to the reader.
For the most part, these will read as generic boiler plate sorts of risks, stuff like:
Customers, suppliers, competition, key employees, foreign exchange risks, and the like...
So for you, you’ll only really get concerned if notice any of that appear odd.
So for instance, a risk of an unfavorable outcome to a particular lawsuit, a particular patent challenge, perhaps political risk.
Those would stand out as being incremental risks.
Sections 2 and 3- Properties and Legal Proceedings, gives you similar sorts of high level warm fuzzies...
or perhaps chilling shivers, if you notice a concern.
Between the description of the business and risk factors, you should get a feel for the risk profile of the company.
Ask yourself if this company feels more or less risky, for example.
-Market leaders are less risky
-Diversified companies are less risky
-Diversified in the sense of geography, customers, suppliers, and product lines
-Large companies tend to be less risky than smaller companies, as they have greater opportunities to achieve economies of scale
This assessment simply gives you context as you review the rest of the results and make comparisons to peers.
The level of risk has a direct, but very difficult to quantify, impact on what the cost of equity is for the company.