According to experts, reading quarterly earnings of a company is an art that needs to be cultivated over time with careful and deliberate effort. To any company, quarterly earnings report is like its inner compass that gives a sneak peek into its present and future performance. It also helps analyse the value of the company. Yet a lot of ordinary investors still cannot fathom a company’s quarterly earnings. How to read the quarterly results of a company? What do these results tell about the company? Why do companies publish their quarterly results in the first place?
As per SEBI (Security and Exchange Board of India) guidelines, every listed company must publish the quarterly reports of the company to the public to safeguard the interests of the investors.
As an investor of a company, a company’s quarterly result will help you assess the present and future performance and value of the company. The quarterly result also tells you whether you should invest long-term in the company. For short -term investors or intraday traders, the quarterly result of a big company could have a direct impact on the market. Every time a big company announces its quarterly result, the markets rise or fall, depending on the effect.
How to read quarterly results?
Gross sales are the total sales of a company within a stipulated time. A steady rise in gross sales is an indicator of growing demand and good business health.
Net sales are the sum of a company’s gross sales minus its discounts, returns and allowances. Net sales can often get factored in when reporting on the statement of income with the top-line revenues. This is a better indicator of business health than gross sales.
Operating income indicates the amount of profit realised from a business’s operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold. It is a measure of the profitability of the company.
On the other hand, non-operating income is other-than-business income. It includes revenues made from dividends, rental income, income, among others.
A steady decrease in operating income could mean a declining market share or reduced demand for the company’s products or services.
Things to consider for quarterly reports
Operating profit= Net sales – Operating expenses
Operating expenses include costs of running the business such as salaries, utility bills like rent, electricity, office expenses such as stationery, license cost. It also includes the cost for research and development, legal and bank charges, among others. Other fixed and variable expenses that form a part of the operating costs need to be deducted from net sales to arrive at the operating profit of the business. A high operating profit indicates a healthy business. The operating profit shows the ongoing business conditions as well as the efficiency of the management.
Margins point at the ‘safety net’ of the company. The profit should not ideally come at the cost of margin. When there’s a decrease in the EBIT margin of the company, it signifies that the company’s profitability has taken a hit.
Interest cost is the money paid for a loan amount, to run a business. Hence, an increase in the interest cost indicates an increase in the debt of the company.
Some other pointers
A company’s net profit is also called its bottom line. It refers to the operating profit minus tax minus loan repayment. It is one of the crucial indicators of a company’s financial health. Hence, it is the most sought-after pointer in a quarterly earnings report. The higher the company’s net profit, the higher is the company’s profitability.
EPS (Earnings Per Share)
When net profit is divided by a total number of outstanding shares, we get EPS. It indicates the profitability of the company. EPS is the part of a company’s profit that is allocated to every individual share of the stock. It is imperative for investors and people who trade in the stock market. The better the EPS of a company, the higher is the profitability. It is yet another important indicator of a company’s financial health. It is widely used in the industry.
For an investor, EPS is a very good indicator of the performance of the company. This, in turn, results in more earnings for the shareholders. For an investor who is interested in a steady source of income, the EPS ratio helps him understand the space a company has for increasing its current dividend. EPS of a company should always be considered concerning other companies.
What else to look for quarterly earnings report?
When it comes to banks, investors should also look at things like net interest margins and non-performing assets. Experts say that investors should also look at the company’s cash-in-hand and pledged shares. All companies may not be declaring their pledged shares quarterly. Investors should also check out the asset-liability statement with the September quarter result as it indicates half the financial year.
Parts of quarterly result
A company’s quarterly earnings report typically consists of an earnings statement, balance sheet, cash flow statement. Here are the details:
Earnings statement: This document consists of the company’s earnings performance within a stipulated time.
Balance sheet: This consists of the company’s assets, shareholder equity, and liabilities if any. It gives an idea of what the company owns and any outstanding items it owes.
Cash flow statement: This document provides information about the cash flow the company receives. This could come from both its current business operations and investor sources. This also includes details on the outgoing cash used to pay for business-related investments, and activities during the period.
These statements give you a glimpse into the financial status of the company. It edits and shortens the information into a simpler format.
Why do investors need to look out for earnings announcements?
Earning reports are often among the largest catalysts for stock movement. In the case of bigger stocks, earnings reports can shake the market. On the day the earnings reports are released, the stock market could be trading at record high or low.
When a company improves its sales yet fails to meet the expectations of the analysts, people will rush to sell their shares. Hence, estimates of the report are also as important as the report itself.
Other important information for investors
An investor or trader should carefully go through the potential risk addressed by the company in its earnings report. The risk could be with regards to a new segment of the business, a change in the company management, among others.
This section of the company report mentions any current legal proceedings or outstanding lawsuits. This does not necessarily mean that an investor has to avoid this company. It’s important to check out the details of the legal case. Small lawsuits are prevalent. However, one needs to tread carefully when it involves big lawsuits.
Unregistered sales of equity securities
This is the part of the report where the company must supply information about “all equity securities of the registrant sold by the registrant during the period covered by the report that was not registered under the Securities Act.”
Quarterly earnings report does reveal a lot about a company’s financial health. By educating yourself more about the ways to read and evaluate earnings report, you could gain a lot of insight into the company’s present performance and its past. Earnings reports could help analyse potential trades. It’s important to consult the earnings report before making any investment. If you want to know more about the quarterly result of a company, you could start trading with Angel One!