Your Guide to Understanding Earnings Reports

Friday, October 30, 2020 6:50 AM | Neal Farmer

Earnings reports are the most common way for investors to see a public company’s recent financial results. Earnings results give investors insight into how a specific company is being run and whether current performance suggests strong future growth.

There is a wealth of information released by thousands of companies every earnings season and no investor has time to digest all of it. Luckily there are many sections in an earnings report that are condensed to the most important information and separate the company’s spin from the actual results.

What Does it Mean for a Company to Report Earnings?

Public companies are required to let investors know how they're doing four time a year. Companies are required to release this information within 35 days from the end of a quarter and 60 days from the end of a fiscal year. Not every company aligns its business year to the calendar year, so some companies report at different times of the quarter, but since most companies do use calendar quarters, this means the period between the end of a quarter and that 35-day deadline can be pretty busy.

Companies tend to release information in three major parts: A press release, often called an earnings release, a conference call, and 10-Q (or a 10-K if it is the end of the year).

The press release itself contains several pieces. There is typically high-level summary of the quarter, some statements from management, and then tables of financial information, which usually includes an income statement, balance sheet and a statement of cashflows. Some companies also break out operating metrics for certain business units or provide other granular details. This will usually include total earnings, EPS and revenue figures as well as some other metrics the company wants to highlight.

Management Discussion

Management’s discussion of the quarterly results gives an overview of the company’s recent performance as well as some updates about expectations going forward. Management will often give guidance on future business projections and what they expect from the overall economy. Companies will often cite growth in other industries or upcoming developments within the business as reasons for optimistic guidance while also mentioning how things like a global pandemic will most likely have an adverse effect on the firm. These systemic risks affect the entire economy but a company can give insight into how it is directly impacted.

Income Statement

The income statement boils down to the company’s revenue and expenses and is often referred to as the profit and loss statement. Net income is equal to the total revenue minus total expenses with total revenue including both operating and non-operating revenues, while total expenses consist of the company's main business, and any other money it brings in. The key metrics here are revenue, earnings, and EPS or Earnings Per Share (EPS) which is simply the total earnings divided by outstanding shares and represents how much money a company makes for each share of its stock. The income statement is one of the easiest ways to see how a company is performing relative to its peers and if the firm is currently being operated by an efficient management team. The first rule of business is to make more than you lose and the income statement shows just how good a company is doing at that. Analysts that follow stock often publish estimates for EPS and revenue, these are typically averaged together to provide what's known as the "mean estimate" or "consensus" number. This typically serves as the market's expectation, or exceeding those numbers is considered a "beat", while falling short is considered a "miss".

Balance Sheet

While the income statement shows what the company is making and losing, the balance sheet reveals what a firm owns and owes. The balance sheet shows a company’s assets, liabilities, and shareholder equity which then allows analysts to evaluate the business’s capital structure and rate of return. What the balance sheet boils down to is the simple equation: Shareholders' Equity = Assets - Liabilities. Shareholder's equity is the money that would be returned to shareholders if the assets were sold and debts paid off. Each of these three categories is broken down into many subcategories but can be simplified. Assets are mostly the company’s cash, inventory, and property while liabilities consist of loans, unpaid bills and other debt. Each industry varies in the content of its balance sheet.

Statement of Cash Flows

The Cash Flow Statement provides data regarding all cash coming in from ongoing operations as well as external investment sources. Additionally, the statement of cash flows includes cash coming out that pays for business activities and investments. The main benefit of the cash flow statement to investors is that it paints a picture of all the transactions that go through a business. The net cash flow is equal to the sum of cash made through operations, investments, and financing. The statement is then broken down into those three main categories that detail the cash flow in each section. Cash flows are one of the most commonly used methods to determine the value of a company and its stock.

Conference Call

Conference calls are typically held after the earnings release is published. This gives management a chance to further tell their story about the quarter, but also allows the public, usually analysts and journalists, to ask management questions about things not covered in the earnings report. This is also where updates on current conditions are often given, such as how business has been going since the end of the quarter.

10-Q

The 10-Q is a comprehensive report of a company’s quarterly results that must be submitted to the Securities and Exchange Commission (SEC). All public companies are required to submit this document regarding their financial position. The 10-Q is typically filed in addition to the earnings report press release, which also gets filed with the SEC under Form 8-K. Press releases are typically just a few paragraphs in size while 10-Q’s can easily exceed over 100 pages.

 

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