How to Read an Earnings Report

The earnings report is a report on a company’s financial performance during the last quarter. It is important for investors to know how to read it for the sake of making the correct decisions. Below you will find instructions on how to interpret this important document, and what you should allot special attention to, in order to achieve the best understanding.

A Company’s Earnings Are Crucial

The reason why earnings are so important is that there you will find the components for profit (or loss) generation of the specific company. You can understand how well or bad it has been performing, its highs and lows, and what potentially has been hampering or slowing down its growth. Of special interest are the net income, the earnings per share (EPS), and the company guidance. Investors use these data to decide on purchasing, selling, or ceasing their interest in the observed company.

How to Read the Earnings Report

The form required for reporting financial earnings, under US securities law, is 1-Q. The reports are released four times per year and received by the US Securities Exchange Commission (SEC). Then the SEC publishes the data for investors to gain a transparent outlook of companies’ financial standing. The common schedule for filing earnings reports is at the end of March, June, September, and December, though that is not strictly mandatory. The actual reporting is done a few weeks after these deadlines.

The main items in the earnings report are the following:

  • Revenues: shows the amount earned in the most recent quarter.
  • Expenses: the amount spent in the last three months.
  • Profits: another term for them is “net earnings”. These are obtained by subtracting the expenses from the revenues. A company capable of consistently bringing profits to its shareholders is considered a good bite for investors.
  • Earnings per Share: a company’s profit divided by the outstanding shares of its common stock. The EPS indicates how profitable a company is, which makes it a valuable indicator for investors and speculators alike.
  • Estimates: the assessments of the company’s performance during the quarter. A company either outperforms (does better than estimated), or underperforms (does worse). In estimates, metrics like revenues, sales, earning per share, etc. are taken into account.
  • Company guidance: the expectations of the company’s financial analysts about how they see the business perform in the near future. Shares usually appreciate in case the guidance is positive, and vice versa.

How to Obtain the Maximum from an Earnings Release

Here is a list of tips which will help to get the maximum when reviewing the earnings report:

  • Read the press release: because reports following the 10-Q form often run to over 100 pages, reading the accompanying press release of the company on its earnings proves to be really helpful. They summarize the essence, so you will quickly gain understanding of the situation.
  • Focus on the management discussion section: in this section, senior company executives assess the company’s financial standing. They outline both strengths and problems, and also discuss key factors comprising new partners, new purchases, or new products. News for both the business sector and for the prevailing situation in the financial sector are also dwelt on. To sum up, by reading the management discussion you will gain a deeper insight into a company’s standing and prospects.
  • Questions which you should seek the answers to: the earnings report provides the answers to the following questions of crucial importance for investors to help them decide for or against investing into the corresponding stock:
    • How did the company fare in the last quarter, and which factors prevailed as the determining ones?
    • What is its performance compared to the past few quarters, for example, up to a year ago? Pay attention to the pattern: do good or bad earnings prevail as a pattern, what are the issues underlying them, and what are the reasons for these issues?
    • What are the origins of revenue streams within the company? In which sectors does it perform strongly? Which company products or services are underperforming, and what are the reasons for the underperformance?
    • Are costs under control? What are the drivers for high expenses, what burdens can be dispensed with, which areas need higher spending and why?

Do Further Research If Needed In case you do not find sufficient information in the earnings report to answer the above questions, you have to research further. You can use your favorite financial and investment platforms. Another source of information is the investor relations department of the company.

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August 19, 2020