Don't be intimidated by a company's 10-K report, the annual report that businesses must file with the Securities and Exchange Commission. You'll become an expert in no time.
1. Start at the beginning, which gives a detailed yet simple description of the company and its business.
2. Read the section on risk factors. Companies are often brutally honest, so they can say they told you so if worst comes to worst.
3. Compare the company's operating income -- the money the firm made from its stated business -- with net income. If it's making (or losing) significant amounts from something other than operations -- say, investments or accounting maneuvers -- you will want to know.
You can often find telling details about the business by reading the notes to the financial statements.
Look for an "unqualified" approval from auditors. Anything else is a red flag.
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