Guide · 5 minutes
How to read a change in a company's risk factors
Once a year each US public company tells the SEC what could go wrong, in the Risk Factors of its 10-K. Most of it is the same as last year. The few sentences that are not are where to start reading. This page shows what to look at, what to check, and what a change cannot tell you.
1. Where the risk factors are
In the annual report (Form 10-K), Item 1A, Risk Factors. Each company files one a year, and the 10-Q reports in between only say what changed. On Tickdelta each company's Risks tab shows the paragraphs of the latest 10-K that are new, with a link to the filing on sec.gov, usually straight to the sentence.
2. What "new" means here
A paragraph is new when no paragraph of last year's Risk Factors shares at least half of its words (digits ignored). A paragraph that was only edited is not counted as new. So a new paragraph is either a topic the company did not write about before, or the same topic in words so different that we cannot match them. The exact rule is on the methodology page.
3. Reading a redline
Where a sentence was changed, we show last year's and this year's together: words that were cut are struck through
and words that were added are highlighted and underlined. Here is an invented sentence, not from any filing, to show the marks:
Wemayexpect to face competition fromseverala growing number of new entrants.
Small cuts and additions are usually editing. A sentence that disappears, or a sentence that says something it did not say before, is worth opening in the filing. Every company page has this view for the sections of its 10-K: see which companies have new risk factors.
4. Five questions to ask of any change
- New topic, or new wording of an old topic? Read last year's paragraph on the same subject. Companies rewrite more often than they discover new risks.
- Do the others say it too? The Risks tab compares a company with its peers: a paragraph several peers also added points to something in the whole industry, not to this company alone.
- Is there a fact behind it? Look for the same subject in the numbers and the other filings: an 8-K, the comment letters, the notes to the accounts. Each tab on the company page links to its sources.
- Is it specific? A risk with a name, a place or an amount in it says more than a general warning that could be in any filing.
- What changed around it? Insider trades, a new auditor or a revised number in the same period are on the same company page, in the same order the filings came.
5. What a change cannot tell you
It cannot tell you that a company is a good or a bad investment, or that the stock will move. We tested our own signals against the market, and none predicted returns (the backtest). A new paragraph is something to read, not a reason to trade. Lawyers write risk factors, and many companies add warnings that only protect them. Nothing here is investment advice.