Building a DCF from a 10-K
A step-by-step route through a company's annual report to find every input a discounted cash flow valuation needs, and the adjustments that turn a value for the business into a value per share.
The short version
Every input a DCF needs is in a company's 10-K, apart from the discount rate, but none of them is labelled as an input. This lesson is a route map. Revenue and margins come from the income statement and the segment note, with one-time items found in the notes and management's discussion. Capital spending, depreciation, and stock-based compensation come from the cash flow statement. Debt, leases, and pension shortfalls come from the balance sheet and their notes. The share count comes from the cover page and the earnings-per-share note. The last step, moving from the value of the business to the value of one share, is where the most common mistakes are made.
By the end of this lesson, you'll be able to
- Locate each input for a DCF in the sections of a 10-K
- Normalize the starting year's cash flow before forecasting from it
- Convert the value of a business into a value per share without double counting
Why this matters
STU Corp's figures arrive on one tidy page. A real company's are spread across a long filing, written for lawyers and accountants as much as for investors. Knowing where to look turns a day of confused reading into a couple of focused hours. This lesson follows the order in which you'd build the model from Building a Model in a Spreadsheet.
Get the filing
Use the 10-K itself, not the press release or a data website. Company filings are free on EDGAR, the SEC's database.1 Press releases often lead with adjusted figures, and data sites sometimes classify items differently from the company. The 10-K has the audited statements and the notes that explain them.
Four parts do most of the work:2
- Item 1, Business, describes what the company does.
- Item 1A, Risk Factors, lists what could go wrong.
- Item 7, Management's Discussion and Analysis, gives management's explanation of the year's results.
- Item 8, Financial Statements, holds the statements and the notes.
Read Items 1 and 1A first. A forecast made without understanding how the company earns its money is arithmetic with nothing behind it.
Where each input is
| Input | Where to find it | What to watch for |
|---|---|---|
| Revenue and its growth | Income statement; revenue note; segment note | Growth from acquisitions, and changes in what's included. Item 7 explains the year's change. |
| Operating margin | Income statement | One-time gains and charges, which Item 7 and the notes identify |
| Tax rate | Income tax note | One-time tax items, and the gap between tax expense and cash tax paid |
| Depreciation and capital spending | Cash flow statement; property note | Spending plans in the liquidity section of Item 7 |
| Working capital | Balance sheet; operating section of the cash flow statement | A one-year swing that won't repeat |
| Stock-based compensation | Cash flow statement; share-based compensation note | Whether to treat it as a cost. It should be. |
| Debt, leases, pensions | Balance sheet; debt, lease, and pension notes | When debt falls due, and obligations that aren't in the debt line |
| Cash and investments | Balance sheet | Cash the business needs to operate, or that's held abroad or restricted |
| Share count | Cover page; earnings-per-share note; equity note | Options, share units, and convertible debt that will add shares |
| Discount rate | Not in the 10-K | Estimated separately, as in Cost of Capital |
Step 1: Clean up the starting year
A DCF grows a starting figure, so an error there is multiplied through every later year. Before forecasting, apply Quality of Earnings to the latest year:
- Remove one-time gains and charges, and add back a typical year's worth of any that recur.
- Use a normal tax rate if this year's was distorted.
- Replace an unusual working capital change with one that fits the company's growth.
- Subtract stock-based compensation, as Stock-Based Compensation argued.
- If the business is cyclical, normalize the margin across a cycle, as in Valuing Cyclical Companies.
Collect five years of history if you can. Several years show which figures are steady and which jump around.
Step 2: Forecast and discount
Build the forecast from drivers and discount it, as the earlier lessons showed. The filing helps with the assumptions: Item 7 discusses trends and spending plans, the revenue note shows how much contracted revenue is still to come, and the risk factors say what management itself is worried about.
One choice has to be made early and kept consistent. Cost of Capital explained that the cash flow and the discount rate must match. There are two routes.
| Value the whole business | Value the shares directly | |
|---|---|---|
| Cash flow used | Before interest, available to lenders and shareholders | After interest, available to shareholders |
| Discount rate | Weighted average cost of capital (WACC). A company's costs of equity and after-tax debt, averaged according to how much of its funding comes from each. Glossary | Cost of equity |
| What the result is | Enterprise value | Value of the shares |
| Then | Subtract debt and add cash | Nothing to subtract |
The STU Corp examples used the second route, which is simpler when a company has little debt. For a company with significant borrowing, the first is usually clearer. Mixing them, for example by discounting cash flow after interest and then subtracting the debt as well, counts the debt twice.
The rest of this lesson is for members
Still to come in this lesson: Step 3: From the business to one share, Step 4: Check the result, Keeping it current, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- SEC Filings: 10-K, 10-Q, and 8-KPart 4: Research and Valuation
- Quality of EarningsFinancial Statement Analysis in Depth (depth track)
- Cost of CapitalPart 4: Research and Valuation
- Reading a Real 10-K, Section by Section coming soonResearch Workshop (depth track)
Learn more
- How to Read a 10-K/10-QInvestor.gov, U.S. Securities and Exchange Commission
Notes and sources
- Investor.gov, U.S. Securities and Exchange Commission. Using EDGAR to Research Investments. Checked 2026-10-01. Back to text
- U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy. Investor Bulletin: How to Read a 10-K. Checked 2026-10-11. Back to text
- U.S. Securities and Exchange Commission. Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (form and general instructions). Checked 2026-10-11.