10K Analysis of a Real Company

Finance, the language of business, can be confusing and intimidating. We have found that exposing participants to a complex financial exercise through a business simulation enables them to become comfortable speaking this language. In addition to the simulation exercise a simple 10K analysis helps to solidify the financial concepts practiced during a business simulation. These are our best practices for running a 10K analysis:

We like to start by getting participants familiar with the 10K and its key sections:

    Form 10K – is a comprehensive summary of a company’s financial performance.

  • Business – In short, what is the company in the business of doing?
  • Selected Financial Data (Income Statement, Balance Sheet, Cash Flow Statement)
  • Footnotes – contains additional information, supplementing or explaining financial statement data. Things to watch for:
    • Significant accounting policies (e.g. depreciation method, revenue recognition, etc.)
    • Long-term debt (maturity, interests, collaterals, etc…)
    • Pension plans (is it underfunded?)
    • Risks and uncertainties1 – related to the company’s operations, vulnerabilities to geographic/customers concentrations and the usage of estimates in financial statements.
    • Contingencies and commitments1 – describe the nature of any reasonably possible losses, and any guarantees, including maximum liabilities.
    • Investments1 – note the fair value and unrealized gains and losses on investments.
  • Management’s Discussion and Analysis (MD&A) – Financial results in terms of the company’s strategy, actions and competitors. It’s the opportunity of management to explain/discuss risks, trends and unusual events.
Ratio Analysis Worksheet

Exhibit 1 – Sample metrics for 10K Analysis.

We then focus the analysis on the Selected Financial Data of two companies within the same industry. Calculations are not meant to be exact since the main objectives are to:

  • Get participants’ hands on actual numbers and reports, and all the variations in format that can be found.
  • Not be scared of looking through the financials.
  • Help participants understand what a metric is telling them.

See Exhibit 1 for a sample set of metrics that can be used during this exercise.

Usually 10 to 15 min. is enough for participants to calculate the metrics on the worksheet. Afterwards a group discussion is carried out to check the numbers but most importantly to discuss its interpretation. Some questions we like asking:

  • How would you explain a metric to someone that doesn’t understand anything about finance?
  • Which company is doing better?
  • Is higher necessarily better? Is lower necessarily worse? Why?

We close the exercise with a discussion of the Strategic Profit Model or DuPont Analysis. It sheds light on what affects the returns on the business: pricing/expense control, asset management, and financial leverage.

This exercise is very versatile as it can be used to increase the understanding of a variety of key metrics of business success and profitability. It can be tailored to any company by highlighting its most relevant metrics.

1Accounting Tools (Feb 2018) Financial statement footnotes. URL:https://www.accountingtools.com/articles/what-are-financial-statement-footnotes.html