Lesson 5 of 6
What ten years cannot settle
Four lessons of arithmetic on filed accounts settle none of whether a business keeps earning, which is what a ratio series never contains.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- A filed ratio series is retrospective by construction: it describes a period that has ended, and the decision it feeds is about one that has not started.
- Concentration, competitive position, and whether the numbers were ever restated do not appear in any of the eight rows.
- A ratio series assumes the integrity of what it was computed from, and the evidence about that integrity sits in the part of the filing the series discarded.
Everything in the four lessons before this one is arithmetic on filed accounts, and none of it settles whether a business keeps earning. That is not a limit of this particular table. It is a property of tables.
Same eight rows, two different books of business
- Company A gross margin · 30% of revenue from one customer44.0%
- Company B gross margin · ten thousand customers44.0%
What is absent from all eight rows
| Absent fact | Where it lives instead |
|---|---|
| Concentration | The segment note, where a customer at 10 percent or more of revenue must be named by amount (ASC 280), and Item 1A in words |
| Competitive position | Nowhere filed plainly; a company describes its own markets, so scepticism comes before arithmetic |
| Regulatory exposure | Item 1A, as a risk rather than a probability |
| Capital allocation quality | Buried inside an average return on all the capital ever raised, years after any one decision |
| Customer scuttlebutt | Not in a filing at all; Fisher's method looks to customers, suppliers and competitors instead |
Concentration is the sharpest case. Two companies, one earning 30 percent of its revenue from a single customer and one with ten thousand customers, can post identical rows for ten years. Under ASC 280, a customer at 10 percent or more of revenue must be disclosed as an amount every year it is true, so the fact is filed, but it sits in the notes, never in these eight rows. Competitive position is different in kind: no filing states it plainly, and Fridson and Alvarez's premise is that the statements are prepared by an interested party, so scepticism comes before arithmetic. Regulation S-K Item 105 discourages a generic risk factor and moves it under a separate heading, which raises the floor on Item 1A without making it a forecast. Fisher's fifteen points are a checklist about the business and its management, and most of them cannot be answered from a filing at all.
The table is retrospective by construction
Every pattern in a ten-year series describes a period that has already ended. Under Form 10-K's general instructions, a large accelerated filer has 60 days after fiscal year end to file, an accelerated filer 75, everyone else 90, so the newest row is months old the day the document exists. Marks's second-level thinking is the sharpest way to hold this. Every figure has been public since its filing date, so whatever it says has already been available to everyone pricing the security. First-level thinking reads eight good rows and concludes something about the business; second-level thinking asks what would have to be true for those rows to be news.
Where the boundary itself moves
Before ASC 842, an operating lease sat in a footnote. After it, the identical obligation sits on the balance sheet as a right-of-use asset and a lease liability. Nothing about the obligation changed; what changed is which side of the line it falls on. A ratio series is built from one side of a boundary that standards move, so whether an obligation is "in" the ratio is a date, not a fixed fact.
What the series shows
- The level and direction of a figure, ten years running.
- Whether a movement was a step or a drift.
- Everything that survives being reduced to a number.
What it assumes
- That customers, competitors and suppliers are stable enough not to matter.
- That management's account of the business is not the only account.
- That the figures were never the subject of an Item 4.02 restatement.
A ratio series assumes the integrity of what it was computed from, and the evidence about that integrity is in the part of the filing the series discarded.
Form 8-K Item 4.02 reports that previously issued statements should no longer be relied upon. When one lands, a series rebuilt afterward shows the corrected numbers and looks exactly like a table that was always right. A disclosed material weakness under Sarbanes-Oxley Section 404, with the Section 302 certifications, is the strongest signal a filing produces about whether its own numbers can be trusted, and it cannot appear in a table computed from the numbers in question.
What to do with this against a real filing
For a company you are researching, write down three beliefs your reason depends on that no figure in a ten-year table could confirm. For each, name the document you would check, and be honest when none exists.
Check yourself
Two companies post identical gross-margin rows for ten years. What can a reader conclude about their customer concentration?
- They must be similarly diversified
- Nothing: concentration is not a figure the series carries at all
- The one with the higher margin is more diversified
Show the answer
Answer: B.
A ratio series can be identical between a company with one large customer and one with thousands. The fact sits in the segment note and in Item 1A, not in a row.What does a Form 8-K Item 4.02 filing report?
- A change of auditor
- A determination that previously issued financial statements should no longer be relied upon
- A new executive officer
Show the answer
Answer: B.
That is a restatement announcement. A ratio series rebuilt after one shows the corrected numbers and gives no sign that anything was ever different.Does adding more years of filed history close the gap between what a table shows and the decision it feeds?
- Yes, ten years is enough
- Yes, but only past twenty years
- No: every row describes a period that already ended, and the decision is about one that has not started
Show the answer
Answer: C.
The gap is structural. A longer table is still entirely retrospective, which is Marks's point about second-level thinking: the figures were already public before anyone read this table.Sources
- Martin Fridson and Fernando Alvarez, Financial Statement Analysis: A Practitioner's Guide, on statements prepared by an interested party.
- Fisher, Common Stocks and Uncommon Profits, 1958, on scuttlebutt and the fifteen points.
- Marks, The Most Important Thing, 2011, on second-level thinking.
- ASC 280, Segment Reporting, including its major-customer disclosure requirement; ASC 842, Leases; Form 8-K Item 4.02; Sarbanes-Oxley Sections 302 and 404.
What this leaves out
- This lesson lists what a ten-year series of filed figures omits. The list is not exhaustive.
- The documents named are those of a US domestic registrant filing on Form 10-K; other filers use different forms.
- Nothing here is a view on Apple or on any security, and the absence of a figure is not evidence about a company either way.