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15-Minute Fundamentals: Evaluating Earnings

15-Minute Fundamentals: Evaluating Earnings

Learn how to interpret a company's earnings.

15-Minute Fundamentals: Evaluating Earnings
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Aired Feb 03, 2023
Austin Hankwitz breaks down where to best find a company's earnings report and what an earnings report consists of. Hankwitz explains the three key financial statements including the income stateme...

Austin Hankwitz: Hey how's it going? How's it going? Happy Friday, everyone. I'm super pumped to be back doing these 15-minute fundamentals shows on Public Live. You guys enjoyed season one so much. We had to come back and hit you with the season two. So I am pumped. Welcome to 15-minute fundamentals on Public Live. This is the show where we break down investing strategies and concepts so you can be a better investor. I'm your host Austin Hankwitz and I create personal finance and investing content online. I have a degree in finance and economics, and I did mergers and acquisitions for a publicly traded healthcare company for a few years out of college. So long story short is I'm a nerd, and I embrace it. As a reminder, this show is for educational purposes only. And this is not direct investing advice. Many of the metrics we'll cover today, however, in the shows are available as part of Public Premium, which gives you more ways to level up your portfolio. You can learn more about that and join the waitlist or sign up or do whatever you want to do at public.com/premium. I'm on it. I love it. I enjoy it. Go check it out. public.com/premium. 

Austin Hankwitz: So this is the episode right? This episode is all about earnings interpretation. Specifically, what are quarterly earnings reports, the specific information that is shared during these events, and how to go about interpreting them for the first time. So with the groundwork being laid, let's get after it. Kicking things off with what exactly is a quarterly earnings report, right. So if you're watching CNBC right now, or scrolling your public feed, you've likely been reading a lot of financial data. And there's a lot of headlines being thrown at you right now, specifically, as it relates to these publicly traded companies, right? Maybe you've seen someone saying this company came in above expectations and their stock is flying because of it, or this company came in below expectations and their stock is sliding. There's a lot of information being thrown around right now. So let's work together to not only interpret it, but to also think through how it might impact your portfolios. 

Austin Hankwitz: Starting at the beginning, right, a publicly traded company is a company whose stock can be bought or sold on the stock market, we all know that we all have brokerage accounts, we get that, right. So think Disney, Amazon, Nike, all that fun stuff. But because these companies are open to the public in the sense that anyone can buy and sell their stock, they have a few responsibilities to uphold as made possible by the SEC, one of those responsibilities is disclosing audited financial information to their investors, right. This is anyone who owns the stock, you, me and everyone else. And so in efforts to do this as efficiently as possible, these publicly traded companies released something called quarterly earnings reports to their public every three months. Because we talk about what's inside of them and how to interpret them, it's important to know where to actually find these things, right. So if we're going to talk about something, I don't want to just say it and then you guys go be puzzled on where to find it. So here are two places where to find this information. Two places where to find these quarterly earnings reports. The first is straight from the SEC website, the Securities and Exchange Commission's website sec.gov. There's a way to search a company name. And, you know, you can read through all the quarterly earnings releases things called like an Edgar, something like that. But you know, be sure to keep an eye out actually for the reports that are labeled as 10 Q's, right? Look for the 10 key of this 8k, 10k, observe the different things, look for 10 Q, that's what you want. 

Austin Hankwitz: The second place to find this information is actually on the company's Investor Relations website. So if you're visiting a website, a company's website, it might be hard to find you like the little tab board, it might not just be apparent. So what I do personally, to find this like section of the company's website, is I google the name of the company. So say Amazon, for example, and then the words investor relations after their name. And then I click enter into Google, and the Investor Relations website is usually like one of the first ones to pop up on Google. So once you're in there, you'll be able to find all these earnings reports that we're going to be talking about. So we know what quarterly earnings are, and where to find them. But how should we begin interpreting the information? Right? How should we be approaching this? 

Austin Hankwitz: So let's first start here with what is actually being shared. And there are two things in particular. So the first kind of bunch of things that are being shared here are the financial statements, right, there are three financial statements that you should expect when a quarterly earnings report is being shared. And these three financial statements are all you need as it relates to understanding the financial health of a company, you've got the balance sheet, the income statement, and the cash flow statement. So starting with the balance sheet here, this is where you'll be able to find a company's assets, their liabilities and their owner's equity. Essentially, you know how much money the company has in the bank or the balances of the short and long-term debts as well as the value of their assets like property, equipment, and other tangible and intangible items. Most investors get overwhelmed by all the information shown on this financial statement. I certainly did when I was starting out. So I'll tell you a few things to look for, in particular when your favorite company reports their earnings so you don't feel too overwhelmed. 

Austin Hankwitz: The first thing I want you to look for is something called net debt. If the company had to pay back all of their debt to their lenders tomorrow with cash, could they do it right now Oh, that is net debt. Another ratio that I like to look for is something called the current ratio, which is essentially, it takes a company's total assets and compares it to their total liabilities, right? So do they have more assets than they have liabilities? And if they do, that's usually a good thing, right? So net debt, if they had to pay back all their debt tomorrow with cash, could they do it, and then that current ratio, assets versus liabilities. 

Austin Hankwitz: So now the income statement. So now we're going to the income statement here, this is probably the most important financial statement of the bunch, at least I think. So This financial statement tells you how much revenue and profit a company made during the quarter, as well as their margins, their expenses, and other key financial insights that you will need when evaluating a company in a business here. So here are a few key items, line items that I want you all to look into when you're reviewing and interpreting the income statement. Right. So we did this with the balance sheet. Now income statement, here's a couple of those line items. The first one here is revenue, right, which appears as maybe sales or net sales or as a couple of names, but it's just you know, how much money is coming into the business, right revenue, money made from selling products and services. Now, a good sign to observe with this line item, in particular, is that it's growing year over year. And usually you'll see a company include last year's same-period financials right up next to this periods to make it easier for you to compare and contrast the growth. So revenue, great ones to the growing. Next up is gross margin. This is a line item gross margin. This is how much actual profit the company's making by selling their product or service. This figure is usually distilled down and interpreted as a percentage. So just take that gross profit margin number then divided by the revenue and you'll get a percentage like, oh, yeah, I've got you know, 82% profit margins like that. That's kind of like what I'm kind of talking about here. Right? So they'll give you the raw gross margin number, but it's up to you then to see what is that percentage margin by comparing it then to that revenue figure. You'll also want to see this figure remain around the historical norms or grow, right, we don't want to see a company's gross profit margins declining, right? That's not a good sign. However, you do not want to see, right, this number decrease. We don't want to do that historical norms coming up, go up and down with seasonality, but never to really see it take a plummet like that. Right. So the last line item here on the income statement to look out for is the after tax profits. This is called net income. We obviously want after tax profits of the companies we're investing into to increase year over year. 

Austin Hankwitz: So we have the balance. We have the balance sheet, we have the income statement. Now finally, let's talk about the cash flow statement. Right? This is my favorite because I believe cash is king, especially as it relates to running and growing a business. Now, this statement tells us about how much cash came into the business. Where that cash came from, did it come from selling products? Did it come from taking on a bunch of debt, right where the cash came from? So how much came in where it came from, as well as how much cash left the business? Right? So for me, I like to keep an eye on the cash flow from operations line item, it tells you how much money the business made by operating its business, right? So it's like, okay, for the last three months, right, because its quarterly earnings report, cash from operations, here's how much cash came into the business by operating our business pretty straightforward. You want to see this figure move up, year over year as well. 

Austin Hankwitz: So now let's round all of us off with the second idea here the earnings call right so we covered the financial statements, all the hard facts, but what about the conference call, where Wall Street analysts get a chance to ask questions. So alongside the financial statements, the CEO and other chief executives at a company will sit down and host something called an earnings call. During this conference call, they'll expand further upon their financial results provide guidance as to where they think their company is headed in the near term, as well as answered questions asked to them by analysts on Wall Street. Now, here's the important stuff to remember with these earnings calls to financial statements that the publicly traded companies shared with us are one thing, these are the hard numbers. But more importantly, it's only a snapshot of a specific moment in time for the company, right, the company's financial results for that quarter to snapshot in time a good picture. The earnings call, on the other hand, allows us the investor to get a more realistic and more importantly updated point of view on the company and where things might be headed. Right. So during this time, we're able to hear from their chief executives also about non-GAAP generally accepted accounting principles, operating metrics, like remaining performance obligations for SaaS companies, or perhaps a backlog of purchased equipment for manufacturing companies, or maybe even the executives best guess on what the economy might have in store for us given their first-party customer data. You'll see a lot of bank stocks give us kind of updates on the economy because they're seeing what people are spending their money on. It's important to tune into these earnings calls as investors not only to hear about the intricacies of the financial data shared but also how have the ability to learn more about the information that is not shared in those financial statements, right? The non-GAAP operating metrics, you know if it's the RPO’s or the SAS companies with backlogs are that other added color around the economy that these companies, these executives rather want to share with us. Also a little side quest here and this is what I like to do for fun. Again, nerd, if you want if you're more of a visual learner, right? Most of these companies actually create a investor presentation, a PowerPoint presentation, essentially, where they take their financial and operating results and turn them into beautiful graphs and images, and all that fun stuff. And you can usually find these investor presentations on their Investor Relations website. But don't be surprised if the company you're looking for doesn't offer presentation. Because again, it's not like required for them to make that it's only you know, for fun. 

Austin Hankwitz: So yeah, there you go. I hope you enjoyed hanging out with me over the last kind of 12 to 15 minutes here for this episode of 15-minute fundamentals. If you want to hear more from me specifically, I have a newsletter. We are this close. I think I'm 70 people away from hitting 10,000 subscribers for that. So if you care about what company is slated to report earnings this week, or the companies that actually what they said in those earnings calls, drop your email address. There's a link in my bio, it's completely free. It's pretty fun stuff. And yeah, this was fun. I'll see you guys on our next episode in March because we're doing these once a month now. But again, my name is Austin Hankwitz. I will see you all in March. This is a lot of fun, and thanks for having me.

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