Earnings season is an exciting time on Wall Street. The season comes four times per year and promises to generate several compelling opportunities in the stock market.
Earnings reports are often met with high levels of volatility and can offer the short-term trader an opportunity for big gains. After all, if the earnings per share beat earnings estimates, the data can send stock prices soaring.
At the same time, earnings reports provide valuable insight into both the financial stability and operational performance of the companies investors are considering diving into for the long haul.
But what exactly are earnings reports, what should you look for when you read them, and what will they tell you about the public companies you’re interested in investing in?
What Are Earnings Reports?
The United States Securities and Exchange Commission (SEC), major stock exchanges like the Nasdaq and the NYSE, and multiple over-the-counter (OTC) markets require publicly traded companies to file a legal document known as a form 10-Q once per quarter.
This document is designed to give investors in public companies a detailed view of the financial stability and profitability of the companies they invest in.
Form 10-Q filings are usually — but are not required to be — coupled with earnings report press releases and subsequent earnings conference calls, on which management discusses the results from the previous quarter.
Although the 10-Q document provides consolidated financial information — including the company’s income statement, balance sheet, and cash flow statement — the earnings report will also generally include these three financial statements along with detailed operational information.
Moreover, the earnings call provides investors with more detailed information surrounding the company’s achievements and a potential opportunity to ask management questions about operations and future prospects.
For example, in an earnings report, you’ll learn about the company’s revenue, earnings per share, cash flow, and other financial information. A company also may share its achievements, including research and development accomplishments, asset sales, advertising programs, and any other operational highlight that will grab the attention of investors.
In the earnings report, the company may highlight that it closed a key acquisition through which it will bring new products and expand revenue. On the earnings conference call, the company will likely go into more details about this acquisition and why it was a strong move in the best interest of the company and its investors.
In addition, annual reports became a requirement for publicly traded companies following the stock market crash of 1929. Following the fourth quarter of each year, these reports provide investors with even more valuable insight into the company’s operations from an annual perspective.
Annual report filings are known as Form 10-Ks and are packed with all of the information you’ll find in a quarterly financial report and quite a bit more. In most cases, a form 10-K will include:
- General Corporate Information. This is basic information about the company including its name, ticker symbol, address, and other general information investors should have access to.
- Operational and Financial Highlights. This document will generally outline operational achievements as well as financial wins throughout the previous year.
- CEO Shareholder Letter. In most cases, annual reports will come with a letter to shareholders of the company from the CEO, giving investors a view of the priorities set forth by the company’s management team and outlining recent successes.
- Narrative Text, Graphics, and Photos. The narrative text, graphics, and photo sections provide compelling diagrams and further detailed information surrounding the company’s performance over the past year.
- Management’s Discussion and Analysis (MD&A). The MD&A section includes discussions on compliance, risk factors, future plans, and other thoughts from management.
- Financial Statements and Notes. As is the case with quarterly earnings reports, annual reports come complete with an updated balance sheet, income statement, and cash flow statement. These reports provide information surrounding the company’s earnings and financial stability.
- Auditor’s Report. Annual and quarterly reports issued by public companies aren’t just produced by the company and given to the public. These reports are placed under serious scrutiny in an auditing process. Once all financial statements are audited, the auditor will provide a report outlining their findings, which will be published with the annual report.
- Summary of Financial Data. The annual report will also come with a summary of financial data. Although this section is appealing, it’s important to look at complete financial data, as summaries can easily hide inefficiencies.
- Accounting Policies. Finally, the company will share the accounting policies it followed in the year prior and policies it plans to follow in the year ahead on its annual report.
Pro tip: If you want to stay in the know on earnings reports for companies you’re investing in, sign up for Atom Finance. They offer both a free and premium version that will give you access to both earnings reports and other financial filings. You can also quickly search through these documents using their X-ray Document Search feature.
When Can You Expect Earnings Reports?
Form 10-Q filings are required to be filed on a quarterly basis. However, it takes time to compile the financial statements and operational updates included in these reports. So, they are generally released two to three weeks following the close of each fiscal quarter.
As a result, earnings season starts a couple of weeks after the close of each quarter. Because calendar quarters close at the end of March, June, September, and December, and most fiscal quarters are in line with calendar quarters, earnings season begins in mid-January, mid-April, mid-July, and mid-October.
What to Look for in Earnings Reports
As is outlined above, earnings reports provide investors with a wealth of updated financial and operational information, but what information is most important for investors to pay attention to?
Some of the most important metrics and updates to look for include:
Net Income and Earnings Per Share (EPS)
Net income, also referred to as net earnings or the bottom line, is the funds left over from income for the quarter (or year) after all expenses are paid.
Net income will show in one of two ways, or both, on an earnings report:
- Net Income. The bottom line will often be displayed as a “total net income” number. For example, If the company generated $100 million in revenue and had $90 million in costs, total net income would come in at $10 million.
- Earnings Per Share (EPS). In some cases, companies will also choose to outline their earnings on a per-share basis. This figure is calculated by dividing the total net income by the total number of shares outstanding. For example, if a company generates $10 million in net earnings and has 10 million shares outstanding, EPS would come in at $1. Even if the company itself doesn’t offer an EPS calculation, most financial media outlets report earnings based on EPS rather than total net income.
If EPS comes in ahead of analyst expectations, the stock will likely see dramatic gains.
Moreover, before making any investment decisions, investors should look into EPS over the past several quarters to see whether the company’s bottom line is growing or shrinking.
Revenue, also often reported as sales, is known as the top line for the company. This is the total amount of money the company generated from sales for the given quarter or year.
When making investment decisions, investors should look into the company’s earnings reports over the past year or two, looking for revenue that consistently outpaces the revenue reported in the previous quarter. This suggests a pattern of revenue growth and is a sign of financial health for the company.
Cash flow is a measure of the money flowing into and out of the company from revenue and other operations such as investments. It’s best to invest in companies that are cash-flow positive, meaning that more money is flowing in the doors than is flowing out.
If a company is cash-flow negative, that means more money is flowing out of the company than into it. The company will need to survive on the funds it has in the bank as long as it can or it will need to borrow money. If that isn’t enough, dilutive transactions that rob current investors of value are likely.
A company’s balance sheet is like a complete financial checkup, providing all vital information that investors need to assess the company’s financial stability prior to making an investment.
The key factors to look for on the balance sheet are:
- Total Assets. Total assets include both current assets — assets that can reasonably be expected to be sold, consumed, or exhausted through normal business operations — and non-current assets, or assets that represent long-term investments whose full value won’t be realized in the current year.
- Liabilities. Liabilities include any expected costs including loans, accounts payable, mortgages, deferred revenue, bonds, warranties, and accrued expenses. A company with a strong balance sheet has far more assets than liabilities.
- Total Debt. Although total liabilities include debts, there are several other types of liabilities involved in that figure. It’s also a good idea to get an understanding of the total debt held by the company. After all, debt is the worst type of liability because it comes with ongoing added costs in the form of interest, which, if the company is unable to pay, can force a company into bankruptcy or dilutive transactions that devastate shareholders.
Guidance can have a major impact on a company’s stock price, even if the company misses the mark on other metrics like revenue or earnings. Guidance represents management’s expectations for the quarter, year, or even years ahead.
Not all companies will provide guidance, and those that do decide for themselves what metrics to provide predictions for. The most common metrics include guidance on expected revenue and earnings.
However, companies may also provide expectations with regard to debt reduction, unit sales numbers, or other important measuring sticks for the business.
Finally, earnings reports aren’t all about financial results. These reports also provide valuable insights as to what the company is doing from an operational standpoint.
Public companies use earnings reports as an opportunity to outline the strides they’ve made toward operational excellence. For example, companies might choose to report results from new marketing campaigns, product launches that were born from the company’s innovation, or key management changes.
When making investment decisions, it’s best to invest in companies that display continued innovation. After all, past performance won’t always be indicative of future results. Paying attention to operational updates will let you know if the company is making an effort to stay on the leading edge of innovation in its field.
Earnings Beats and Misses
Before earnings reports are released, analysts often weigh in with their earnings expectations for what they believe the company will report in the coming quarter.
If the company’s reported earnings come in ahead of the consensus estimate, there’s a strong chance that the stock price will head for the top, often on heavy volume. Conversely, when earnings miss consensus estimates, stock prices may fall dramatically.
So, there’s quite a bit of volatility surrounding earnings reports, based heavily on whether the company reporting its financial results missed, met, or exceeded earnings expectations.
How Current Are Earnings Reports?
When making investment decisions, it’s important to remember that all financial data surrounding the stability of the company you find is outdated.
Earnings reports only come once every three months, and they are published weeks — and sometimes a month or more — after the close of the company’s fiscal quarter. The financial stability of a public company has the potential to change dramatically during the course of a three-month period.
As a result, although earnings reports are important, it’s also important to read through press releases and SEC filings associated with any company you’re interested in investing in for further clues as to the evolving financial stability of the company.
How to Use Earnings Reports to Expand Your Stock Market Profits
Educated investment decisions tend to be the most profitable ones. Earnings reports are used to get a detailed understanding of the financial condition of the companies you’re considering investing in.
Earnings reports are useful for both investors and traders.
- Investors: Before making an investment decision, a wise investor will comb through the past eight earnings reports. This will give them a view of revenue growth, earnings growth, balance sheet strength, and operational activities during the past two years.
- Traders: Traders often track earnings reports that garner a lot of attention using earnings calendars. After all, if the results come in ahead of earnings expectations, the stock could skyrocket, leading to dramatic short-term gains.
When making moves in the stock market, any data you can find surrounding the company you’re considering investing in is valuable data. Earnings reports provide investors with a detailed quarterly view of the financial performance companies have achieved.
Moreover, these reports let investors in on the operational moves the company is making and whether it is leading the charge in innovation within its industry.
As a result, these financial reports are valuable tools that every investor and trader should have in their toolbox and should be used when researching any stock investing opportunity.