How to Read Company Reports Like a Pro

October 4 by Leonardo Siligato

Ah, quarterly company reports… How the stock market eagerly anticipates earnings season the way Hollywood looks forward to Oscar season. The best part is, it happens four times a year instead of just once.

These reports let investors know how a publicly traded company performed in the last quarter. There are also annual and half-year reports but we’ll focus on quarterly earnings here, since they’re the most likely to move stock prices.

Why are quarterly company reports such a big deal?

Investors eagerly awaiting those company report cards

They’re the best way to gauge the financial health and future of a company. And it’s the most regular and consistent source of information available. A majority of companies publish their earnings reports in the same period – that is, in January, April, July and October. (Though this largely depends on the company’s fiscal or financial year, which doesn’t always follow the calendar year.) This means both trading volume and volatility are likely to increase in these months…and that yields a lot of trading opportunities!

While many companies provide guidance, or an indication of future earnings, investors also look to analysts to provide estimates. These estimates are often priced into the stock. The market tends to focus on whether the company misses, meets or beats these expectations. As a result, a company’s stock can fluctuate wildly on the day its earnings report is released… Not unusual to see shares soar or plummet up to 20% on these days!

How to read quarterly company reports like you’re Warren Buffett

We get it, reading company reports can be like trying to get through War and Peace. They’re long, boring and full of terms that could put off anyone without a Bsc in Finance.

But think of them like IKEA instructions. They might look confusing initially and you might take nine weeks to assemble a basic shelf for the first time. But once you’ve put together a few pieces of furniture, you’ll feel like a mother-freakin’ DIY expert.

Same with company reports. While you won’t become a financial analyst overnight, you can learn how to scan through them to glean the most important bits. So here’s our quick start guide that will show you the critical indicators to zero in on; where to find them; and most importantly, how to interpret them:

1. Revenue

Whether you call it revenue, sales or topline, it tells you the total turnover of the company. Or to put it simply, the amount of money it brought in for the quarter. If it’s too low, the company could struggle to cover costs and expenses. So obviously, investors like to see year-over-year growth here.

2. Net profit

This is what’s left after the company has paid for all the costs, expenses and the staff trip to Ibiza. You find it at the end of the income statement, right at the last line. (Yup, it’s literally the “bottom line”.) It gives investors a good picture of a company’s operating efficiency and how profitable it is compared to its peers.

3. EPS

EPS stands for Earnings Per Share. To calculate this, you just need to divide net profit by the number of outstanding shares. It also indicates the profit attributable to each share. The higher the EPS, the more your shares will be worth since investors are willing to fork out more for higher returns. That’s why investors often give more weight to EPS than to profit.

4. Other metrics

The three metrics described above are important for every business. But there are also company or sector-specific factors to consider.

A quick example: For relatively young tech companies like Twitter or Snap, rather than revenue or EPS, shareholders are more interested in growth. So they focus on metrics like the number of daily active users. This helps them understand both the current market and the future potential of such companies.

All About The Expectations

Now that you know what the key metrics in any company report are, it’s important to understand another crucial factor. The numbers alone don’t move share prices. Sometimes a company can post double-digit revenue growth and yet, investors could still react by selling their shares.

What gives? Well, Dickens knows that it all boils down to…great expectations.

Much of those expectations are set by analysts who get paid fat salaries by banks and rating agencies to predict the future. These analysts will gaze into their crystal balls (and by that, we mean comb through reports and crunch data) to give their forecast of earnings. By averaging out all of these forecasts, you get the “consensus.”

Then when the quarterly report comes out, investors don’t just compare the numbers to last year’s figures. They compare them to the expected numbers. If they beat expectations, the stock is likely to go up. But if they’re lower than forecast, you can bet a selloff will take place.

A message to investors…

 Need a Little Guidance?

You can also take a look at the company’s guidance, which is its own estimate of its performance in the next quarter. While companies are not legally obligated to provide guidance, some do. Guess it’s a way to manage the shareholders’ expectations and avoid any nasty surprises in the actual earnings announcement!

So now that you know the basics of company reports, hopefully you’re a little less intimidated by them. At least you can start off by focusing on the main metrics that matter to learn what’s going on with the company. (Without getting lost in the deluge of data!) That should help you determine if a stock is worth it or not!

Written by

Leonardo Siligato

Holds a degree in Economics and Finance from Bocconi University, where he also worked as a research assistant for a while. After several years at Italian national all-news radio station Radio 24, he now delivers financial news and articles at BUX. A mountain enthusiast, he could not have chosen a better place to pursue his passion than the Netherlands… Look him up on BUX: @Siligon_Valley

Disclaimer: All views, opinions or analysis expressed in articles are that of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice and these articles should not be construed as such.

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