Chapter 4: Reading a company without a finance degree
Cascade Coffee's latest annual report runs 184 pages. The part that tells you whether it is a healthy business fits on an index card: $2.4 billion in sales, growing 9% a year, keeping 12 cents of every sales dollar as profit, earning $2.40 per share, and carrying more debt than cash but not worryingly more. Those five numbers are the skeleton of the whole report. This chapter shows you where they live, how to pull them out of any public company in under an hour, and what they can and cannot tell you.
Cascade Coffee is fictional, built with realistic proportions so we can read it end to end without anyone's lawyers getting involved. Every public company publishes the same numbers in the same places, by law.
The five numbers
Revenue is everything the company sold during the year, before any costs come out. People also call it sales or the top line, because it sits on the top row of the income statement. Revenue answers the most basic question about a business, which is whether people actually hand it money.
Growth is how much faster revenue ran this year than last year. A business selling 9% more coffee each year and a business selling 2% less are different animals, even if every other number matches. One year of growth is weather; five years of it is climate, so look at the trend, never a single reading.
Margin is the share of each sales dollar the company keeps as profit. The version worth memorizing is net margin: profit after every cost, divided by revenue. Margins are mostly a property of the industry. A grocery chain keeps a penny or two per dollar and thrives; a software company can keep a quarter or more. Compare a company's margin to its own history and to its direct rivals, never to the whole market.
Earnings are the profit itself, in dollars, and earnings per share (EPS) is that profit divided by the number of shares, which makes it the number that belongs to your one slice. Chapter 1 showed why share count matters as much as the price on the sticker; EPS is where that lesson cashes in.
Debt is what the company owes, weighed against the cash it holds. Debt is a tool, and like most tools it is dangerous mainly in large amounts. A useful first pass is to compare net debt, meaning debt minus cash, to a year of earnings: owing one or two years of profit is ordinary, owing ten is a story you need explained.
Where the numbers live
Every US public company must file a 10-K, its audited annual report, with the Securities and Exchange Commission. The SEC posts every filing for free on EDGAR, its public database. Type a company's name into EDGAR's search box, open the most recent 10-K, and you are holding the same document the professionals read. There is also a slimmer quarterly version called the 10-Q.
The 10-K has a reading order once you know that most of it exists for lawyers. The business section up front describes what the company actually does, in its own words, and is worth ten minutes. The management discussion explains why the numbers moved this year. The heart of the document is the financial statements, and the one to start with is the income statement: the page that walks from revenue at the top to profit at the bottom. Companies stretch it across dozens of line items. It compresses to eight.
Cascade Coffee, end to end
Cascade sold $2.4 billion of coffee, food, and beans last year, up 9% from about $2.2 billion the year before. Its income statement, compressed to the eight lines that matter, looks like this (all figures in millions):
| Line | Amount | Running result |
|---|---|---|
| Revenue | $2,400 | $2,400 |
| Cost of goods sold | -$1,020 | $1,380 |
| Gross profit | $1,380 | |
| Operating costs (stores, salaries, marketing) | -$960 | $420 |
| Operating profit | $420 | |
| Interest on debt | -$36 | $384 |
| Taxes | -$96 | $288 |
| Net income | $288 |
Check the arithmetic: $2,400 minus $1,020 leaves $1,380 of gross profit, the money left after paying for the beans, cups, and milk themselves. Subtracting $960 of operating costs leaves $420 of operating profit from actually running the business. Interest takes $36, taxes take $96, and $288 million of net income reaches the bottom line. Net margin is $288 divided by $2,400, which is 12%.
Now the EPS arithmetic, shown rather than asserted. Cascade has 120 million shares outstanding, a number printed on the 10-K's cover page. Net income of $288 million divided by 120 million shares is $2.40 of earnings per share. If you own 100 shares, the business earned $240 on your behalf this year, whether or not any of it was mailed to you. Chapters 2 and 6 cover where that money goes.
Debt comes from a different page, the balance sheet, and needs thirty seconds. Cascade owes $600 million and holds $250 million in cash, so net debt is $350 million. Against $288 million of yearly profit, that is about 1.2 years of earnings, a comfortable load for a steady business. The $36 million interest line confirms it: interest eats about 9% of operating profit, leaving plenty of room for a bad year.
Signals of a healthy business
The five numbers describe the business; three quick checks tell you whether to trust them.
First, real cash. Profit is an accounting opinion; cash is a fact. The cash flow statement, which sits next to the income statement, shows the money that actually moved. Cascade reported $288 million of net income and generated $310 million of operating cash flow. When those two numbers travel together year after year, the earnings are honest. When reported profits climb while cash flow sags for several years running, somebody is being optimistic with the bookkeeping.
Second, growth that does not cost the margin. Cascade grew revenue 9% while net margin held near 12%, up slightly from 11.6% the year before. That is the healthy pattern. A company that grows 20% a year by slashing prices, with margin collapsing from 12% to 4%, is buying its growth and sending you the bill later.
Third, the share count. Chapter 1 introduced dilution, the quiet shrinking of your slice when a company issues new shares. The 10-K states the count plainly, so trend it: Cascade's count drifted from 124 million to 120 million over three years, meaning each remaining share owns slightly more of the company. A count ballooning 5% or more each year means your slice of every future profit is shrinking that fast, and the EPS math above shows exactly where it bites.
- Serial "one-time" charges. A restructuring cost every single year is a regular cost wearing a costume, and "adjusted" profits that exclude it are fiction.
- Receivables growing faster than sales. Money customers owe but have not paid, swelling year after year, can mean sales were booked that may never turn into cash.
- Profits up, operating cash flow down, for more than a year or two. The accounting opinion and the bank account are telling different stories.
- The auditor quits, or the company switches auditors after a disagreement. Auditors rarely walk away from a paying client without a reason.
- The share count balloons while the press releases celebrate per-share growth. Check the denominator yourself.
What you can skip forever
You are allowed to ignore most of the document. The glossy photos, the letter about values, and the bulk of the legal footnotes can go unread for your entire investing life. So can the company's "adjusted EBITDA" press release, a self-graded report card in which the company invents its own profit measure and then earns an A on it. The audited statements in the 10-K are the version someone could be sued over, which is exactly why they are the version you read.
Before buying any single stock, write down its five numbers from the latest 10-K: revenue, growth, net margin, EPS, and net debt against a year of profit. If you cannot fill in the card, you are not buying a business yet. You are buying a ticker.
The honest limit
Reading filings makes you informed. It does not make you advantaged, and the difference matters enough to end the chapter on. Everything in a 10-K is public from the second it hits EDGAR, and Chapter 3 showed what markets do with public information: thousands of professional readers fold it into the price within minutes. Knowing that Cascade earns $2.40 a share does not tell you whether the stock is a bargain at $48, because everyone else bidding on it knows the same thing. What the work actually buys you is protection and judgment: you will not own a company you cannot describe, you will notice when the story changes, and you will hold through a scary headline because you know what you own. Chapter 5 takes the next step, which is what a price says about the expectations already baked into it.
Dev read his first 10-K on a flight, expecting agony, and finished the useful parts before the drink cart arrived. His routine now takes about 40 minutes per company: business section skimmed, eight-line income statement rebuilt on a notecard, cash flow checked against net income, share count trended across three years. Two companies he was excited about failed the card. One had grown "adjusted earnings" five years straight while its share count grew 8% a year; the other showed receivables rising at twice the pace of sales. He still cannot predict where any stock is going next quarter, and he knows it. He just refuses to own anything he could not explain to his mother in two sentences.
Key takeaways
- Five numbers describe any business: revenue, growth, net margin, EPS, and debt against cash. All of them live in the 10-K, free on EDGAR.
- The income statement compresses to eight lines. Cascade Coffee: $2,400M revenue, minus $1,020M cost of goods, minus $960M operating costs, minus $36M interest, minus $96M taxes, leaves $288M net income, a 12% margin.
- EPS is profit divided by share count: $288M over 120M shares is $2.40. Watch the share count; dilution shrinks your slice silently.
- Trust checks: cash flow tracking net income, growth that keeps its margin, and a share count that holds or shrinks. Serial one-time charges, swelling receivables, and departing auditors are leave-now signals.
- Reading filings makes you informed, never advantaged. The price already knows everything you just read; the edge is self-knowledge, not foreknowledge.
Sources: SEC EDGAR company filings · SEC Form 10-K explainer · Investor.gov: Stocks basics · FINRA: For investors