Earnings season insights: understanding earnings reports to capture market opportunities

Moomoo Learn joined discussion · Oct 10 01:42

Updated on October 29

This week, the Q3 earnings season is in full swing. During this critical period, investors can evaluate a company's operational performance through its earnings reports, which may lead to fluctuations in stock prices.

How can investors interpret earnings reports and find potential trading opportunities in volatile market conditions?

Four-Step method to interpret earnings reports

Earnings reports contain a wealth of information. What key information should investors pay attention to? We have summarized four steps for you.

1. Understand the business model

Financial data is certainly important, but before delving into the numbers, investors need to know what the company does. The items such as "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" can help you better understand the company's business model.

2. Income statement: profitability analysis

The income statement reflects the profit or loss of a company over a period of time. The profit number such as operating income and net income represent the company's profitability. Investors also need to pay attention to the quality of the profits, including gross margin, operating profit margin, and net profit margin.

The following chart presents key profitability formulas commonly used to evaluate a company's profitability. Utilizing these metrics in combination can provide a more comprehensive assessment of a company's operating performance. However, please note that these figures are based on historical data and should not be considered investment advice.

Earnings season insights: understanding earnings reports to capture market opportunities

The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.

We also have a place that lets you view these indicators with just one click. Click here to try the Financial Indicators feature, or find it under Stock Page> Company> Financials.

3. Balance sheet: solvency analysis

– Long-term solvency: The debt-to-asset ratio can assess whether a company is insolvent.

– Short-term solvency: The current ratio, quick ratio, and cash ratio can measure the company's short-term liquidity.

The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.

You can also find the several ratios mentioned here in the Financial Indicators section mentioned above.

4. Cash flow statement: liquidity analysis

The cash flow statement includes cash flows from operating, investing, and financing activities. By observing net cash flow, investors can better understand the financial health of the company.

Cash flow is a crucial indicator of a company's financial performance and sustainability, impacting everything from daily operations to long-term strategic planning. Moomoo Learn simplifies the measurement of cash flow through easy-to-understand methods, as illustrated in the following chart.

The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.

You can find all the above information under Stock Page> Company> Income Statement> Cash Flow, or you can click here to try out this feature directly.

Identifying potential trading opportunities

In previous articles, we have introduced two types of stock price patterns—Earnings Flag and Bad Earnings Surprise, which correspond to situations where the stock price rises or falls after the release of earnings reports.

1. Earnings Flag

The Earnings Flag pattern occurs where the stock price experiences a significant rise, consolidates, and then continues to rise further after releasing its earnings report.

- Pattern Confirmation: The pattern is confirmed when the price breaks out above the highest point or pierces through a trend line.

- Trading Strategy: This pattern has two potential buy signals, which occur when the price closes above the flag trendline (D) and when the price closes above the highest point of the pattern (A). Note that the price may rise quickly and then fall. If the price weakens subsequently, consider taking profits quickly.

2. Bad Earnings Surprise

The decline pattern refers to a short-term continuous bearish pattern, where the stock price breaks lower and continues to decline after the company's earnings report.

- Pattern Confirmation: A downward breakout occurs when the price closes below the intraday low posted on the announcement day.

- Trading Strategy: Short-term investors can opt for timely stop-loss; long-term investors can hold and continuously reduce their holding costs; additionally, investors can also profit from swing trading by short selling.

By leveraging these two patterns, investors can determine their trading strategies.

For further understanding, you can review the article:

What should investors do after the stock price rises following an earnings report?

Stock price drops after earnings. How to deal with it?

Utilizing Moomoo for the earnings season

Moomoo's earnings calendar feature lists companies that are about to release their earnings reports soon, allowing investors to add calendar reminders for companies they are interested in. Go to Moomoo: Markets> Country' sub-tab> Earnings.

The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.

Furthermore, on the specific stock page under the "Company" section, you can view the company's earnings forecast data as well as more fundamental information.

Summary

– The earnings season is a crucial time for investors to reassess and adjust their investment portfolios. By carefully analyzing a company's financial reports, you can identify companies that have outperformed expectations or may be undervalued by the market.

– Moomoo offers courses on financial statement analysis to help you quickly grasp the key information. Refer to our courses - Decode Earnings with 12 Infographics.

– Moomoo continuously monitors the star companies in the market, providing you with the latest market dynamics and investment advice. Refer to our courses - Deciphering Earnings of Big Names.

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