HOW TO ANALYZE ๐ง EARNINGS ๐ REPORTS ๐๐๐
Investing in stocks is investing in a portion of a publicly traded company.
If the company continues to grow, the value of the stock will increase. If the company doesn't operate well, the value of the stock will decrease.
So how do we know if a company is doing well or not?
The answer lies in the earnings report.
An earnings report is a filing made by public companies to report their performance over a specific period. It offers a detailed picture of a company's financial health and operating results.
Generally speaking, public companies will release earnings reports every quarter. The ones released after the first three fiscal quarters are called quarterly reports, also known as Form 10-Q. The ones released after the four fiscal quarters are called annual reports, known as Form 10-K. The 10-K provides a yearly update of the company's business and includes more detailed information than the 10-Q.
So how do we know if a company is doing well or not?
The answer lies in the earnings report.
An earnings report is a filing made by public companies to report their performance over a specific period. It offers a detailed picture of a company's financial health and operating results.
Generally speaking, public companies will release earnings reports every quarter. The ones released after the first three fiscal quarters are called quarterly reports, also known as Form 10-Q. The ones released after the four fiscal quarters are called annual reports, known as Form 10-K. The 10-K provides a yearly update of the company's business and includes more detailed information than the 10-Q.
For investors, It is important to learn how to read earnings reports.
On the one hand, the earnings report is like the company's medical examination form. By reading this form, investors could gauge the company's financial health and make smarter investment decisions.
On the other hand, the earnings reports will have a huge impact on the company's stock price.
For example, if a company's earnings report is better than market expectations, it may push the stock price higher; If the earnings report falls short of the market expectations, the stock price is likely to fall.
However, there is a lot of content in the annual report, including the company's business, risk factors, and financial statements.
How to read it?
We have summarized four steps to help you read the earnings report.
The first step is to understand the business model, determining its main products and services, what subsidiaries it owns, and what markets it operates in.
The second step is to take a look at the company's profitability. By analyzing the income statement, you can see if the company is profitable and how profitable it is.
The third step is to analyze the solvency of the company deeply. Analyze the balance sheet to see if the company is at risk of bankruptcy.
The fourth step is to analyze the company's cash flow to see whether the company has enough cash for future growth or distribution to shareholders.
Through the above four steps, investors could gain more insights into whether the company is performing well and how well the company runs.
What is an earnings report?
An earnings report is a document that all publicly-traded companies are legally required to produce every quarter. The report outlines the financials of a company, so itโs an opportunity for the business to share its current outlook with investors and the general public.
Earnings reports are released around the same time, in what is known as earnings season. During peak earnings season, over 100 companies can report every single day. Earnings season is a couple of weeks after the close of a quarter.
Usually, this is:
โข April, for the quarter ending in March
โข July, for the quarter ending in June
โข October, for the quarter ending in September
โข January, for the quarter ending in December
โข April, for the quarter ending in March
โข July, for the quarter ending in June
โข October, for the quarter ending in September
โข January, for the quarter ending in December
Itโs worth noting that while most companies divide the year up into these quarters, not all do.
Learn more about earnings season.
โข Where can you find earnings reports?
Earnings report filings will go straight to the exchange regulators, such as the US Securities Exchange Commission (SEC), who publish company earnings to investors. But you can also usually find earnings reports on each companyโs investor information hub.
Earnings report filings will go straight to the exchange regulators, such as the US Securities Exchange Commission (SEC), who publish company earnings to investors. But you can also usually find earnings reports on each companyโs investor information hub.
โข What to look at in an earnings report
Earnings reports can be hundreds of pages long, but for the most part, there are only a few metrics that investors will look at to make their judgements.
Earnings reports can be hundreds of pages long, but for the most part, there are only a few metrics that investors will look at to make their judgements.
These include:
โข Revenue or sales
โข Expenses
โข Net income
โข Earnings per share
Mostly, traders and investors will focus on these financials, but itโs always important to be aware of the other factors that have influenced its performance. The other information that will be covered in an earnings report will look at any ongoing legal issues and potential risks to the company. It also includes the managementโs view of the financial quarter and its future outlook.
Company revenues
โข Revenue or sales
โข Expenses
โข Net income
โข Earnings per share
Mostly, traders and investors will focus on these financials, but itโs always important to be aware of the other factors that have influenced its performance. The other information that will be covered in an earnings report will look at any ongoing legal issues and potential risks to the company. It also includes the managementโs view of the financial quarter and its future outlook.
Company revenues
A companyโs revenue โ also known as sales or top line โ is the amount of money itโs made through sales during the quarter. Revenue isnโt necessarily an indicator of the firmโs overall success, but it can paint a picture of how consumers interact with the company.
When looking at revenues, you should be assessing whether the companyโs sales have increased or decreased from the same quarter the previous year, and the previous quarter that year.
The differences between quarters can help you ascertain whether sales have increased or decreased, whether the cost of sales (logistics, marketing, rent, people, etc) is cheaper or more expensive, or whether market risks have impacted sales.
Mostly, investors will focus on revenues first to understand the companyโs health โ particularly if the company, sector, or economy is in a period of decline. As if sales are continuing, but other market risks are impacting the rest of a companyโs financials, it can be a sign theyโll bounce back.
Operating expenses
A companyโs expenses are the money theyโve spent during the quarter on operations. This includes costs that are involved in the complete end-to-end of the product or service, such as research and development (R&D), marketing, and general head costs of running the business.
While expenses will detract from a final profit, some outgoings are viewed as a positive by markets. For example, larger investments into R&D can indicate an upcoming new technology, and a large hiring push in new geographic locations can be a sign of future expansion.
Net profits
A companyโs profits โ also known as its bottom line or net income โ is the amount of money the firm has left after itโs subtracted all of its expenses from its revenue. This is the most important metric as itโs the money a company makes and will have for future operations or to distribute to shareholders.
A company that reports profits every quarter will usually see demand for its stock, particularly if this translates into dividends. However, a net loss isnโt always a turn-off for investors either. Some companies can take years to turn a profit but will appeal to investors based on the earnings potential.
Often when the expenses are more than the revenues, the company has made up the difference through loans. A huge pile of debt can lead investors to be more cautious about buying the companyโs stock.
Earnings per share
The earnings per share (EPS) metric is a measure of how much profit a company has generated allocated to each outstanding share of its common stock. This is probably the most talked-about metric, one youโll see all over post-earnings press and analysis.
Itโs calculated by subtracting the difference between a companyโs net income and dividends, divided by the number of shares a company has on the market.
If a company has a high earnings per share, itโs usually an indication that it has money available to reinvest or distribute to shareholders.
Tips for reading earnings reports
1. Read third-party analysis and estimates
Both before and after an earnings report, you should take a look at third-party analysis from financial professionals.
In the run-up to an announcement, analysts will start releasing their earnings estimates โ particularly for EPS. While these can indicate what to expect, theyโre more important after the report is public.
Interpreting earnings reports arenโt an exact science, as a lot of the subsequent share price movements depend on how the market perceives the financials, rather than the financials themselves.
Youโll often hear talk about a companyโs earnings โbeating estimatesโ or โmissing estimatesโ, and this disparity between predictions and actual figures can have a big impact on share prices.
If the estimates are close to or spot-on for the actual financials, markets will likely not move that much after the event, as there is no new information to factor into the share price. However, if the real figures are above or below estimations, thereโs often volatility as investors and traders rush in to adjust their positions.
Get the latest news and analysis from our in-house experts.
2. Compare financial trends and company guidance
One of the most important things to notice when youโre reading an earnings report is the trends each number is showing you. Is the companyโs revenue increasing or decreasing? Is the bottom-line rising each year?
When you combine any trends with the company guidance and analysis that the management team gives, you should be able to judge whether or not the company is confident in its future.
Company guidance is released alongside earnings reports, although itโs not a legal requirement. It gives investors an idea of what could happen in the next quarter and year ahead.
Company guidance does have a big impact on shares, as itโs the most forward-looking part of the report. If the guidance is lower than expected, it will cause the share price to drop, and higher guidance can boost the share price.
3. Read the press release
An earnings report can be well over a hundred pages, so a lot of share traders will look to find the headline facts theyโre interested in. As the reports are so long, it can be easy for companies to gloss over certain details or hide data amongst a lot of wordy explanations.
One way of finding the highlights is by looking at the press release that accompanies the report and gives an overview of the essential numbers and bottom-line information. However, itโs important to note that these come from the companies themselves. So, in much the same way as the earnings report, they can have a positive spin.
A lot of traders will look straight to the tables of data, skipping over all the companyโs interpretations of its performance. This way, the information is fairly black and white.
4. Take the CEO with a pinch of salt
A CEO is a salesperson. Theyโre there to make the company look good and boost investor confidence, even when there is something worth worrying about.
Listening to the earnings call and reading the comments from the CEO are vital to understanding what the company thinks about its future, but you should always compare this to the numbers to see if everything tallies up. You want the financials and company outlook to compliment each other. If there are troubling numbers, the CEO should acknowledge this and provide a solution to investors to ease concerns.
If a CEO or managementโs statement is exceptionally positive, and the figures donโt align, it can be a red flag.
How to trade top stocks
You can speculate whether share prices will rise or fall during earnings season:
1 Open a Brokerage account, or log in if youโre already a customer
2 Search for the company you want to trade
3 Choose your position and size, and your stop and limit levels
4 Place the trade
1 Open a Brokerage account, or log in if youโre already a customer
2 Search for the company you want to trade
3 Choose your position and size, and your stop and limit levels
4 Place the trade
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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103422981 : GOLD!
Coach Donnie OP : We have been here before. Remember, the stock market only exists because it makes money and multiplies wealth. In order to transfer wealth to you and your family youโll need to be patient.
Last earnings season we saw the same thing with Megacaps and the broader stock market. But it rebounded very well in Sept and Oct. I believe Nov and Dec will be higher for the stock market. Donโt allow market manipulation to cause you to panic sell. Of course, when you buy or sell is your decision.. For me, Iโm staying strong and staying long. All will be wellโ
Coach Donnie OP : ELECTION ๐ณ COUNTDOWN: HOW THE MARKET ๐ MAY MOVE ๐ HOW WILL YOU STRATEGIZEโ๏ธ