What you need
- The latest 10-Q and the most recent 10-K, both from SEC EDGAR.
- The prior quarter's 10-Q, so you can compare balances and disclosures.
- Any 8-K filings made since the quarter ended, which may report events after the 10-Q was written.
- A spreadsheet or notes file with a fixed set of fields (see Step 6).
- About an hour for a small company. Longer if the notes are dense or the debt is complex.
Step 1: Find the filing and read the cover page
Go to SEC EDGAR, search the company name or ticker, and filter the filing list by form type 10-Q. Open the main document, not the exhibits. Check the period end date and the filing date. A filing that arrives close to the deadline, or a Form 12b-25 notice of late filing, can point to accounting or audit issues.
The cover page states the number of shares outstanding as of a recent date, usually a few weeks after quarter end. Use this figure as your starting share count. It is more current than the balance sheet and more useful than the weighted average shares on the income statement, which blends the whole quarter.
Record the share count and its date. If the company has more than one class of stock, record each class.
Step 2: Read the balance sheet for cash, restricted cash and debt
The balance sheet gives you the raw inputs for net cash per share. Record these lines:
- Cash and cash equivalents. The most liquid assets.
- Short-term investments or marketable securities. Usually Treasury bills, commercial paper or similar. Check the investments note for what they hold.
- Restricted cash. Cash held for a specific purpose, such as collateral for a letter of credit or an escrow. Shareholders cannot use it freely. It may be shown separately or folded into another line, so check the cash flow statement, which reconciles total cash including restricted cash.
- Short-term and long-term debt. Include notes, term loans, credit facility borrowings and convertible notes.
- Operating lease liabilities. Not debt in the narrow sense, but a fixed claim on future cash.
- Preferred stock. It ranks ahead of common shareholders and may carry a liquidation preference.
Compare each line with the prior quarter. A sharp fall in cash with no matching fall in debt means the company spent it. A sharp rise may mean it raised equity, which shows up as a higher share count.
Step 3: Measure cash burn on the cash flow statement
The cash flow statement in a 10-Q is usually year to date, not for the quarter alone. To get the quarter, subtract the prior 10-Q's year-to-date figure from the current one. For the first quarter, the year-to-date figure is the quarter.
Two measures matter:
- Operating cash flow. The cash the business generated or consumed.
- Operating cash flow minus capital expenditures. A simple measure of free cash flow, or burn if it is negative.
Then look at the financing section. Proceeds from share issuance, at-the-market offerings, new borrowings and debt repayments all show up here. A company that funds its burn by selling stock is transferring value from existing holders.
Divide unrestricted cash by quarterly burn to estimate how many quarters of runway remain. Compare that with the expected date of the catalyst. If the runway is shorter than the time to the catalyst, the thesis needs a funding plan.
Step 4: Read the notes that change the numbers
The notes to the financial statements carry the detail behind each line. For special situations, four notes deserve the most time.
Debt
The debt note lists each instrument, its interest rate, maturity date, covenants and any conversion terms. Write down each maturity date and amount. A maturity that falls within twelve months is a near-term claim on cash. Covenant breaches or waivers are often disclosed here first.
Commitments and contingencies
This note covers purchase obligations, guarantees, lease commitments and potential liabilities. A contingency the company judges probable and estimable is accrued on the balance sheet. One that is reasonably possible is only disclosed. Read both, because the disclosed ones are not in the balance sheet numbers.
Legal proceedings
Litigation appears in the contingencies note and in Part II, Item 1 of the 10-Q. For a legal catalyst, this is where the company describes the case, the court, the stage and any ruling. Compare the wording with the prior quarter. A new sentence often matters more than the whole section.
Subsequent events
This note covers material events between quarter end and the filing date: a financing, an asset sale, a settlement, a layoff or a change in leadership. These events are not yet in the balance sheet. A subsequent event can change your net cash figure more than anything else in the filing.
Also check the first note for a going concern disclosure. If management has substantial doubt about the company's ability to continue, it must say so.
Step 5: Read MD&A liquidity and the risk factor changes
Management's discussion and analysis is Part I, Item 2. Skip to the section headed liquidity and capital resources. Here management explains how it expects to fund operations, how long it expects current cash to last, and what financing it may seek. Look for specific statements, such as "we believe our existing cash will be sufficient to fund operations for at least the next twelve months." A change in that statement from one quarter to the next is a signal.
MD&A also explains changes in revenue and expenses, restructuring charges, and any strategic review. For a company exploring a sale or a liquidation, this section may give the most direct description of the process.
Risk factors are in Part II, Item 1A. Many companies say only that there have been no material changes from the 10-K. When a company does add or revise a risk factor, read it closely. New risk factors about delisting, financing, key customers or litigation often appear here before they become news.
Part II, Item 2 covers share repurchases and unregistered sales of equity. A buyback below net cash adds value per share. Unregistered sales add dilution.
Step 6: Record what you found
Use the same fields every quarter. The table below is a template.
| Field | Where to find it | Why it matters |
|---|---|---|
| Shares outstanding and date | Cover page | Base for every per-share figure |
| Cash, equivalents, short-term investments | Balance sheet, investments note | Gross liquid value |
| Restricted cash | Balance sheet or cash flow reconciliation | Exclude from usable cash |
| Total debt and maturity dates | Balance sheet, debt note | Claims ahead of equity, and when |
| Leases and preferred stock | Balance sheet, lease and equity notes | Further claims on cash |
| Quarterly operating cash flow and capex | Cash flow statement, year to date less prior | Burn rate and runway |
| Contingencies and litigation | Contingencies note, Part II Item 1 | Possible claims not on the balance sheet |
| Subsequent events | Subsequent events note | Changes since quarter end |
| Liquidity statement | MD&A | Management's own runway view |
| New or changed risk factors | Part II Item 1A | Early warning of new problems |
A worked example
The numbers below are illustrative and describe a hypothetical company. Company A reports 40 million shares on its cover page. Its balance sheet shows $90 million in cash and short-term investments, of which $6 million is restricted as collateral. It has $10 million of notes due in eight months and $4 million of lease liabilities.
Usable cash is $84 million. Subtracting debt and leases leaves $70 million, or $1.75 per share. The cash flow statement shows $15 million of operating cash outflow year to date after two quarters, so burn is about $7.5 million a quarter. The subsequent events note reports a $3 million legal settlement paid after quarter end.
Adjusted net cash is now $67 million. If the catalyst is three quarters away, expected burn of about $22.5 million brings the figure to roughly $44.5 million, or about $1.11 per share. The headline cash figure of $2.25 per share was about double what a shareholder could expect. This is the gap between a screen and a 10-Q.
Where this goes wrong
A 10-Q is backward looking. Its balance sheet is weeks old by the time it is filed, and a company burning cash quickly can look very different by the next filing. Read the 8-Ks filed since quarter end.
Quarterly statements are unaudited. Errors and restatements do happen, and small companies with thin finance teams are more prone to them.
Burn is not constant. A restructuring can cut it. A lawsuit, a product launch or a wind-down can raise it. A runway estimate based on one quarter can be wrong in either direction.
Disclosure language is cautious by design. Management may describe a strategic review in neutral terms until a deal is signed. The 10-Q tells you what is known, not what will happen. For the event side of the thesis, see what makes a stock catalyst.
Common mistakes
- Using the weighted average share count. It lags. The cover page figure is more current.
- Counting restricted cash as usable. It is committed to a purpose.
- Reading the year-to-date cash flow as a quarter. Subtract the prior period first.
- Skipping the subsequent events note. It is short and can change the answer.
- Ignoring off-balance-sheet claims. Contingencies, guarantees and purchase obligations are real even when they are not accrued.
- Reading one quarter in isolation. The trend in cash, burn and wording tells you more than any single figure.
If you are screening for candidates before reading the filings, start with how to find stocks trading below net cash. Dombey's published research applies this filing review before each catalyst; see the research archive.
The bottom line
For a special situation, a 10-Q is a test of how much value is real and how long it will last. Start with the cover page share count, then cash, restricted cash and debt, then burn, then the notes on debt, contingencies, litigation and subsequent events. Read MD&A liquidity and any changed risk factors last. Record the same fields every quarter, and let the trend guide your view more than any single filing.