🧐 How to Read 10Ks Like a Hedge Fund
Adapted directly from the original thread by Ming Zhao (@FabiusMercurius) titled “🧐 How to Read 10Ks Like a Hedge Fund”.
1. Start with the Business Overview
Here’s what to hunt for:
Market ecosystem – Who are the suppliers, distributors, and partners? How is every $1 of revenue split across the value chain?
Revenue model – Does the company make money through subscriptions, ads, transactions, or something else?
Product lines – Is it a pure-play business or a diversified collection? What’s the core engine?
2. 🚩 Check for Red Flags
Focus on the Risk Factors section. If anything gets added, it’s usually not for fun—it’s because lawyers said it had to be there.
Examples:
If "cybersecurity breach" is added, something probably happened.
If "asbestos liability" shows up, expect ballooning legal costs.
Risk sections are rarely edited unless something has materially changed.
3. MD&A – Management’s Real Voice
In the Management Discussion & Analysis, look for:
Revenue growth drivers (and deceleration reasons)
Expansion strategy – new products, partnerships, geographies
Metrics that beat or missed
Moat – how they define it and defend it
Key risks
Governance changes or exec shifts
Forward guidance
Pro Tip: If it’s your first time reading a company’s 10-K, read the entire MD&A and business overview.
If you’ve read it before, use tools like FileMerge or opendiff to spot changes from last year.
4. Financials – Not Just the Numbers, but the Story
Let’s break down the three statements—and their red flags.
4a. 📄 Income Statement
Revenue growth YoY – Especially in tech, where valuations are based on revenue multiples
Margins – Operating leverage should improve margins over time
One-time expenses or write-offs – Could mask true profitability
Discontinued operations – Are they shedding bad segments?
4b. 💵 Cash Flow
Changes in working capital / Days Sales Outstanding – Early signs of solvency or customer deterioration
Rising accounts receivable – 🚩 Poor capital discipline or failing collections
Negative CFFO – 🚩 Bad sign if it’s consistent
CFFO much lower than Net Income – 🚩 Earnings may be artificially inflated
CFFI (cash from financing) ≫ CFFO – 🚩 They’re relying on financing to operate
Capex < Depreciation – 🚩 Not reinvesting; future growth may suffer
4c. 📊 Balance Sheet
Debt/equity > 200% – 🚩 Possible liquidity crisis
Interest coverage < 5x – 🚩 May struggle to cover interest from operations
Big drop in cash without explanation – Where did the money go?
High goodwill – 🚩 Sign of overpaying for acquisitions ("bad will")
5. Footnotes – Where the Bodies Are Buried
This is where analysts earn their keep. Don’t skip.
What to look for:
Revenue recognition policy
GAAP vs non-GAAP reconciliation – What’s in Adjusted EBITDA?
Off-balance-sheet liabilities / Variable Interest Entities (VIEs)
Lease commitments
Legal proceedings
Debt maturity timelines
Restatements or errors
6. Unresolved SEC Staff Comments
Most 10-Ks won’t have anything here—good.
But if this section has responses to SEC comments, the company has had compliance or reporting issues.
(Fabius had to dig hard to find an example—Forrest Oil Corp. They no longer exist.)
7. Executive Compensation
Want to understand a CEO’s true priorities? Follow their bonus plan.
Executives are usually comped on:
Revenue – 20.2% of the time
EPS
Operating income
Incentives explain behavior—whether it's overhiring, cutting R&D, or pumping short-term metrics.
Also look at:
Board independence
Related-party transactions
Golden parachutes (see: Disney/Ovitz $130M scandal)
8. Beneficial Ownership
Follow insider behavior:
High insider ownership – Skin in the game
Insider buying – Bullish sign
🚩 Insider selling – Not always bad, unless it's en masse post-IPO
Examples:
Tom Siebel sold aggressively post-$AI IPO = 🚩
Brian Armstrong was rumored to have sold 75% of Coinbase, but it was actually ~2% = overblown
Final Word: Read What Others Don’t
Fabius puts it best—many overlook 10-Ks, but these filings are gold mines of information.
“If you can’t bash but got $20K to drop, get a Bloomberg. If not, read 10-Ks.”
Reading financial filings isn’t about memorizing line items—it’s about training your eye for change, context, and credibility.
🙏 Credit
Original thread by: @FabiusMercurius
Read it here