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How to Decode a Company Earnings Report: What You Need to Know

How to Decode a Company Earnings Report: What You Need to Know

Regardless of how much experience you have in the stock market, it’s essential to be knowledgeable about earnings. Savvy traders and investor must quickly learn how to interpret an earnings report in order to glean key information that will inform their choices in the stock market. Once you understand what an earnings report can tell you, that information can be used to determine liquidity and profitability ratios, offering you a better sense of a company’s cash flow. You can use this information to influence your own buying and selling decisions in regards to your stocks. But what exactly are you looking for in these reports? We’ll go over some key metrics that you should look for and tips for using that information to help you make decisions when reviewing a company’s earnings report.

What Is An Earnings Report?

Any publicly traded company in the United States is required to submit quarterly earnings reports four times a year, as well as a full annual report in the fourth quarter. The quarterly report, which is known as Form 10-Q, must be submitted to the Securities and Exchange Commission (or the SEC) within 45 days after the end of the fiscal quarter. The annual report, which is called Form 10-K, can be filed anywhere from 60 to 90 days after the end of the fiscal year. These reports offer a snapshot of a company’s financial position. Since publicly traded companies belong to their shareholders, there is a certain amount of financial transparency that they must maintain. At the end of the day, your company must be able to demonstrate results. It can sometimes seem like certain stocks continue to go up with little regard to earnings, which can prove frustrating for the average investor. However, at some point, those losses catch up, and a company really has to show some results.

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The Form 10-Q is divided into two main sections (with subsections in each part). In the first part, information like a company’s cash flow, shareholder equity, and balance sheet are presented, along with information about how the management interpreted the market, company performance in the quarter, and controls and procedures. The second part covers any recently completed or outstanding lawsuits, defaults on senior securities, different risk factors in the market, any unregistered equities sales, and how the money from those sales was used. The rest of the section contains information and other exhibits to support that data. Keep in mind that although earnings reports and press releases released by a company to the public are based on Form 10-Q and 10-K, the companies will be presenting all of that information in the best way possible in order to make a good impression on potential investors and stockholders.

What Should You Look for in a Company’s Earnings Report?

When you look at a company’s earnings report, you’ll want to begin by checking out the change in net income, earnings per share (EPS), and revenue since the previous year. You’re looking for the rate at which these numbers are changing, whether they have grown or decreased, and how they compare to one another. For example, if you notice that a company’s sales grew faster than its profits, you know that the margins have shrunk, whereas if the profits outpace the sales, then the margins have widened or grown.

Look closely at other margins, as well. While a company could choose to put a positive spin on any information in the report, looking at its margins (money going out versus coming in) might give another story. Look for whether gross margins and operating margins grew or shrank, and then check the other information from the company to find out why there were any changes. If you see narrowing margins, you’ll want to determine the cause. For instance, it could be a higher cost of raw materials, competitive pressures, or other aspects.

Compare the company’s EPS to expectations. Around two-thirds of companies surpass the earnings estimates, so any misses should have an explanation within the report. Sometimes a miss is caused by something temporary, like a timing issue with an order, so it might be worth your time to give the company the benefit of the doubt. However, if they simply failed to meet expectations, you might need to decide if it’s time to sell.

Take the time to review the 10-Q in its entirety, if you can, rather than to just read the earnings report or press releases from the company. As mentioned above, these are great tools to help you as an investor interpret a company’s financial position. However, all companies will want to paint themselves in the best way possible. Because of this, you may want to double-check some of the language in the earnings report against the hard numbers you will find in the 10-Q. At more than 100 pages, it can be dense and difficult to get through. But the end result will be worth it for you, since this will give you a more accurate picture of the financial state of the company.