Thread by @heymaxkoh

How to read an Annual Report in 1 hour.

A step by step guide for busy people:

Context:

This is NOT the best way to read an annual report.

It's just how I do it with limited time, while holding my 9-5 job.

I will use "10K / Annual report" interchangeably.

I'll also share some other great guides to reading a 10K at the bottom of this thread:

1. Be clear on your intention

First, why are you reading the 10K?.

"Understanding the business" is a terrible answer. It's too broad.

You will end up reading passively.

Because you don't know what to look for.

1b. For me, reading a 10k is purely to understand one thing:

A company's business model.

That's it.

This includes:

- what products they sell
- how they make $$
- basic unit economics

Fine tune your antenna to look for that.

2. Limit your time.

I find that 45-60 mins is a typical duration before I start feeling sleepy.

With this in mind, it creates urgency for me to move fast before steam runs out.

I become more selective of what I read in the 10K.

Which helps me remember the best ideas I need.

3. Read the "Business" section

Time: 30 mins

This section helps me understand a few things:

- what they sell
- what are the prices
- who are their customers
- how they make money

From here, I can already tell whether this interests me.

If it doesn't, I stop right here.

4. Read the MDA section

Time: 15 min

This helps me understand the recent results and direction of the business.

So I can evaluate whether they are executing well or not.

Often, some stuff in this section is also repeated from the "Business" section.

So I can move quickly.

5. Financial Statements

Time: 15 mins

I check for the basic stuff like:

- revenue growth
- gross profit margin
- cash flow
- cash/debt position

This helps me understand the unit economics.

That's all.

I do NOT spend much time here. This might shock some of you. Here's why:

5b. Because I don't get my numbers from the 10K.

I usually get them from the quarterly reports instead (10Q).

I find that the 10Q provides more metrics and KPIs, which the 10K sometimes lacks.

Question: What about the Risks section?

I don't read it.

This will get me in trouble for saying this.

But I wanna keep it real and share my actual process as it truly is...

I do NOT read the Risks because I find there are more effective ways of getting that info.

How?

I use Seeking Alpha and Fintwit to find the bearish cases.

Firstly, it's easier and more entertaining to read.

It's not so dry and dense.

Secondly, most of these bear cases would naturally cover 90% of the company risks.

It's a more effective use of my time.

BONUS Tip #1: Highlight as you read

I do this mainly to keep my hands moving.

Prevents me from falling asleep.

I highlight the parts that explain the business model and how they make money.

Then I copy and pull out all these highlights onto a google doc.

(continued...)

And I make a summary the next day on these highlights.

This takes me roughly an hour to do.

This is optional.

But it helps me understand the company well as I write it in my own words.

Here's an example of a summary I did for Roblox:

https://twitter.com/heymaxkoh/status/1449263597343764481?s=20

BONUS Tip #2: Read the S1 using these above steps

The S1 is the company's IPO prospectus.

I like to read both the 10K and S1, then compare them to each other.

This is especially useful to understand companies that have been around a longer time.

(continued...)

Because the contrast helps me see how they evolved.

For example, if you look at amazon's S1 in year 1997:

it talks about offering better prices and wide selection for customers

In 2021, it's still saying the same thing.

Though the words used have changed...

The essence of the mission is still there.

This tells you a lot about their consistency and sticking to their original Day 1 mission.

That's it.

This is how I go through a 10K in 1 hour.

Being in a 9-5 job, I don't have the luxury of reading it word for word.

So this has worked really well for me.

If you'd like a more in depth way to read a 10K, @FabiusMercurius has a great guide:

https://twitter.com/FabiusMercurius/status/1390793393584828421?s=20

Also check out this great youtube video.

His channel covers a lot of great content on how to read annual reports and financial statements.

If you found this helpful, follow me at @heymaxkoh

I share about how I attained financial freedom before age 30, by investing in great businesses.