For investors, an earnings report is a crucial tool that can provide deep insights into a company’s financial health and overall performance. But, for someone new to investing or financial analysis, it can seem overwhelming.
Being a good investor means being an informed investor. By learning to read an earnings report, youre taking a solid step toward making smart decisions in the stock market.
This guide will break down how to read a companys earnings report and what key elements to focus on to make informed investment decisions.
An earnings report tells you the overall economic health of a company, including how much money it made during a specific time period.
Earnings reports can help you determine whether to buy, sell, or avoid a stock entirely.
Earnings reports come out quarterly, and companies report them to the SEC via a 10-Q.
The most important parts of an earnings report are the income statement, balance sheet, cash flow statement, and statement of shareholder equity.
The press release and presentation deck portions of an earnings report can hold marketing bias, so do your due diligence and read the numbers.
To gain more insight and add context to the numbers, you can join a company’s earnings call, a webcast, or a conference call led by company executives.
What is an earnings report?
When you invest in the stock market, youre investing in a portion of a publicly-traded company. In order to be a publicly traded company, a business must file both quarterly and annual financial statements to the Securities and Exchange Commission (SEC). This financial statement is called a 10-Q, or earnings report.
An earnings report is a publicly-traded companys outline of performance over the last quarter. It shows how the company has done financially and legally, which should give you a good indication of its economic health. Put more simply, it lets you know if the company is making money. This helps you decide when to invest, how much to invest, or whether you should invest at all.
3 Key parts of an earnings report
1. Press release:
The first part is a press release with a few paragraphs on how the company has fared over the last quarter, as well as a section on economic data.
To make it more consumable for investors, these companies transform their 10-Q into a press release that shares significant parts of the earnings report. Some information in the press release includes revenue, net income, dividends, and earnings per share.
Here, youll also find a management discussion surrounding holistic financial conditions.
2. Presentation deck:
Another part of the report is a presentation deck that outlines the most positive financial data for the company during the last quarter.
This presentation is geared toward investors and works to visualize highlights and successes throughout the last quarter.
Finally, there‘s the 10-Q, which is often long and shows a fluff-free version of the companys financial data over the last quarter.
3. 10-Q:
In the 10-Q, youll find an income statement, balance sheet, cash flow statement, and any market risks the company may be facing.
Its illegal for companies to fake numbers, but thats not to say such instances dont happen. In most cases, the 10-Q portion of the earnings report is the most telling section as it contains no marketing bias.
If youre currently investing in a publicly-traded company or planning to in the future. You should always take the press release and presentation deck of an earnings report with a grain of salt. Theyre valuable documents that you definitely want to read, but they are marketing materials developed to promote investments. If you want a no-fluff display of economic health, head straight to the 10-Q.
When do companies report earnings?
Publicly traded companies report their earnings to the SEC and investors every three months or quarterly. Not every company has to report at the same time, though many submit during whats commonly referred to as earnings season. This occurs at the end of the following months:
March
June
September
December
You can find earnings reports on the SECs EDGAR platform or through financial news websites. Public.com also provides detailed earnings report analysis along with the audio recordings, original transcripts and official presentation deck of the reporting company.
How to read an earnings report?
Once a company submits their earnings reports to the SEC, the SEC publishes them through the EDGAR platform on their website. Use the search bar to find a specific companys documents.
Here are the most important parts of any earnings report:
1. Income statement
How much money did the company make within the last quarter? This is often noted in relation to one or more previous quarters. Within an income statement, youll find a few specific aspects:
a. Revenue:
AKA sales (you may hear people refer to this section as the top line). Revenue, shows the total amount of money a company made during the quarter. Here you can look at whether revenue has grown or shrunk compared to the previous quarter or year.
b. Cost of revenue/Cost of sales:
This is the total cost of the good or service sold.
c. Operating expenses:
These are the fees involved with running a business, aside from the COGS.
d. Earnings / Net income:
AKA profits, net income, or bottom line.Net income is the companys profit after all expenses, taxes, and costs that have been deducted from revenue. This figure tells you how much money the company is actually keeping after paying all its bills. Higher net income means more profitability, which is crucial for long-term growth.
Oftentimes, companies experience a loss during a quarter. In that case, youll see the monetary value in parentheses.
e. Earnings per share (EPS):
This puts a companys earnings into perspective for investors. To get this number, a company divides its earnings by the number of outstanding shares.
The resulting value reflects what the earnings would look like if they were evenly spread out across all the companys shareholders. Its a way for investors to compare a business profitability against others in the industry.
2. Balance sheet
This balances a companys assets and liabilities, AKA what they own versus what they owe.
3. Cash flow statement
This is where youll see how much money a company exchanges with others. Cash flow shows how much cash a company is generating from its operations. A strong cash flow means the company has enough liquidity to pay its debts, invest in growth, and return value to shareholders through dividends or stock buybacks. Cash flow can sometimes give a clearer picture of a companys financial health than net income.
4. Statement of shareholder equity
Whats the value of all the companys outstanding shares? Whats the potential dividend payment that the company will make? In other words, whats the change in interest for their shareholders over the last quarter?
5. Guidance
Guidance refers to the company’s outlook for future quarters. Many companies offer guidance on revenue, earnings, or other key metrics. Positive guidance can boost investor confidence, while negative guidance might signal potential trouble ahead.
6. Year-over-year (YoY) and quarter-over-quarter (QoQ) comparisons
Earnings reports typically provide comparisons of key metrics from the same quarter last year (YoY) and the previous quarter (QoQ). YoY comparisons can give you a longer-term view of growth, while QoQ may help you see how the company performs in the short term.
To get a fuller picture of a companys financial standing, you can compare its most recent earnings report to the previous one. You can even go further by pitting the earnings report against earnings expectations to see if a company is on track according to its strategic business plan (that is if they have one at all).
How to Spot Potential Concerns in a Company’s Earnings Report
Missed expectations: If a company misses Wall Street’s revenue or EPS expectations, the stock may take a hit.
Declining margins: Decrease in profit margins could indicate that a company is facing higher costs or struggling to maintain pricing power.
Negative cash flow: If a company is consistently reporting negative cash flow, it may struggle to fund future growth or cover its debts.
Rising Debt: A significant increase in debt without corresponding revenue growth could indicate that a company is over-leveraging and may face a financial crisis.
How do earnings calls work?
Numbers alone dont always tell the whole story. Thats where earnings calls come into play.
Earnings calls are web or phone conferences led by publicly traded companies to discuss earnings reports. Theyre beneficial for investors because they meaningfully put the data into context. At the same time, they provide guidance for future investors and answer questions people may have about the report.
Typically, companies use a press release to share upcoming earnings calls, which tend to take place shortly after their earnings report is published. Attendees typically include investors and stock market analysts.
Heres a basic agenda for earnings calls:
To start the meeting, an Investor Relations Officer (IRO) delivers a liability-limiting statement in the event that actual numbers differ from those in the call. Then, the CEO or another executive discusses the financial results. Finally, the company gives way to a Q&A session for participants to take part in.
Upcoming earnings report calls
To learn about upcoming earnings report calls, check out the Nasdaq Earnings Calendar. The site showcases company calls on a daily basis. These calls occur Monday through Friday, and they take place pre-market, after hours, or at an estimated time.
Within Public app, members can view upcoming earnings call dates for specific companies and even set calendar events to be reminded in advance.
Once you find a company call you want to attend, search the companys investment-related press releases to find the link or dial-in number.
Simplifying earnings calls for informed investment decisions
Earnings calls can feel daunting, given the volume of information that they contain. Breaking them down into their key components, the 10Q, press release, and presentation materials, can help investors unpack the data being shared.
While the press release and presentation might be illuminating in terms of a company marketing approach or strategic positioning, investors should pay the closest attention to the 10Q, which is a bare-bones look at the company’s financial performance over a given quarter.
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