Investments

How to Read Company Earnings Reports Like a Pro

Ruby Layram 15th Oct 2024 No Comments

Reading Time: 8 minutes

If you have ever braved the world of financial news, you’ve probably heard the term ‘earnings reports’ floating around. An earnings report is an official document that can be used to assess the financial health of a company. These reports provide valuable information that can help you to make informed decisions and spot potential investing opportunities.

If you’re serious about investing and want to make informed decisions, learning how to read a company’s earnings report is crucial.

These reports are like a financial health check for businesses—packed with useful information that can help you decide whether to buy, hold, or sell a stock. But they can also be a bit overwhelming at first glance, with all the jargon and numbers.

To help you understand these documents, I’ll walk you through exactly what you need to know to understand company earnings reports like a pro in this guide. By the end of this guide, you’ll be able to look at an earnings report and get a clear picture of a company’s financial standing, its risks, and whether it’s a smart investment for your portfolio.

What is an earnings report?
Key components of earnings reports
How to interpret an earnings report
Top tips for reading earnings reports

What is a Company Earnings Report?

An earnings report is like a quarterly report card for companies. Every three months, publicly traded companies are required to release an earnings report, which gives investors and analysts a detailed look at how the company is performing financially.

The report is packed with financial data, including the company’s revenue, profit, expenses, and cash flow. It also includes some insight into what the company’s management team expect in the upcoming quarters.

The earnings report schedule

Most companies release their earnings reports quarterly, which means there are four key ‘earnings seasons’ throughout the year. These typically occur in January, April, July, and October. These are the times when investors really tune in to see how companies are performing.

At the time of writing this guide, we are bang in the middle of Q3 earnings season (October) – how relevant of us!

How are earnings reports released?

Most companies release their earnings reports on their websites under the “Investors” or “Financial Information” section. They may also release press releases to reputable news publications such as Reuters or Bloomberg.

Alongside releasing the reports, companies might host an earnings call or give a speech. During this call, the management team will answer questions and discuss their reports and future plans openly with investors. These calls can be very interesting if you are a shareholder.

Where can I find company earnings reports?

If you’re interested in digging into an earnings report yourself, you have a few options. You can check the company’s own website or head to financial news platforms like Yahoo Finance, Bloomberg, or Reuters.

Most online investment platforms also have earnings reports available for companies you’re tracking, often presented with charts and tools to help you analyze the data more easily. The best thing is that you can usually access earnings reports for free!

Key Components of Earnings Reports

Now that we know what an earnings report is and where to find it, let’s dive into the key components of a typical report.

Earnings reports are divided into several sections, each providing important information about the company’s financial health. Here’s a breakdown of the sections you’ll need to pay attention to.

Income Statement

The income statement is often considered the most important part of an earnings report. It shows the company’s revenue, expenses, and profits over the reporting period. Essentially, it answers the question: did the company make money, or did it lose money?

When reading the income statement, you want to focus on three key numbers:

Total revenue (or sales)
Operating profit
Net income

These figures give you a snapshot of how well the company is generating revenue and managing its expenses.

Balance Sheet

The balance sheet is like a snapshot of the company’s financial position at a specific point in time. It shows the company’s assets (what it owns), liabilities (what it owes), and shareholders’ equity (what’s left over after liabilities).

The balance sheet helps you assess how well the company is managing its debt and whether it has enough assets to cover its liabilities.

If a company is unable to pay what it owes, shareholders might not see much profit! This is a warning sign of poor financial management.

Cashflow Statement

The cash flow statement shows how cash moves in and out of the company. You’ll see how much cash was generated from operating activities, investing activities, and financing activities.

What you’re looking for here is a company that generates positive cash flow from its operations—meaning it’s bringing in more money than it’s spending. A company can have impressive revenue on paper but still struggle if it doesn’t have enough cash flow to keep the lights on.

Net Revenue

This is the company’s total sales or revenue after deducting things like returns, discounts, and allowances. It’s a key figure because it tells you how much money the company actually made from selling its goods or services, not just the headline number.

You might read positive news stories about companies seeing better than expected revenue. This means that their total revenue was higher than they initially anticipated at the start of the quarter.

Net Income

Net income is often referred to as the company’s “bottom line.” It’s the profit after all expenses, taxes, and interest have been deducted from total revenue. If a company’s net income is consistently positive, that’s a sign of good profitability.

Operating Expenses

Operating expenses are the day-to-day costs of running the business, such as salaries, rent, and utilities. Lower operating expenses relative to revenue can indicate that a company is managing its costs well.

Dividends

Dividends are payments made to shareholders out of the company’s profits. Not all companies pay dividends, but if they do, the earnings report will indicate how much was paid per share.

This is particularly important for income investors who are looking for stocks that provide regular dividend payments. Look for companies that have paid consistent dividends over the years – this shows that they are reliable long-term.

Number of Shares

This is the total number of shares outstanding, which is important for calculating key metrics like earnings per share. The number of shares can change over time, especially if the company is buying back stock or issuing new shares.

Earnings Per Share

EPS is one of the most-watched metrics in an earnings report. It’s calculated by dividing the net income by the number of shares outstanding. A rising EPS is usually a good sign because it means the company is becoming more profitable on a per-share basis.

Risk Factors

Many earnings reports also include a section on risk factors, outlining the potential challenges or risks the company is facing.

These might include things like changes in regulation, competition, or market conditions. It’s important to pay attention to this section to understand the risks associated with investing in the company.

Risk factors give you an idea of whether a company fits your desired risk tolerance. All companies should understand and acknowledge potential risks.

How to Interpret an Earnings Report

Once you understand the basic components of the earnings report, the next step is to learn how to interpret the information. To do this, you need to understand the meaning behind the numbers. This can take quite a bit of practice (and expert guidance). Nevertheless, here are a few top tips for success.

Look for trends

Are the company’s revenues growing steadily, or have they started to flatten out? Is net income improving, or is it shrinking?

A single quarter’s results might not tell you much, but if you look at the company’s performance over time, you’ll get a better sense of its financial health.

As we mentioned above, a rising EPS is considered to be a good sign as is consistent dividend payments.

Compare the numbers to the company’s predictions

Most companies provide predictions for the following quarter in their earnings reports, offering some forecasts based on their inside knowledge. If the actual earnings meet or exceed this guidance, that’s a good sign.

Also, compare the earnings report to analyst expectations. Earnings that beat predictions can push a stock’s price higher, while earnings that fail to meet expectations can cause it to drop..

Signs of Good Financial Health

When reading an earnings report, there are several signs that indicate a company is in good financial health. Keep an eye out for:

Consistent revenue growth: Is the company increasing its revenue year after year?
Positive net income: Are profits growing steadily?
Healthy cash flow: Does the company generate enough cash to cover its expenses and reinvest in the business?
Low debt-to-equity ratio: Is the company managing its debt responsibly?

If a company is ticking these boxes, it’s likely in a strong position financially.

Red Flags to Look For!

As well as knowing the good things to look out for, it is also wise to be aware of red flags. Here are a few warning signs that might find when reading through the reports.

Declining revenue: If a company’s sales are shrinking, that’s not a good sign!
Rising operating expenses: Is the company spending more and more to maintain the same level of revenue?
Negative cash flow: A company that consistently burns through cash may struggle to stay afloat.
High debt: Companies that are heavily in debt may struggle to pay it off, especially if interest rates rise.

Signs of an Undervalued Stock

One of the most common use cases for earnings reports amongst investors is to find undervalued investment opportunities.

Sometimes a company’s earnings report will show solid financial performance, but the stock is still trading at a lower price than you’d expect. This could mean the stock is undervalued—a potential buying opportunity!

Key things to look for include:

Strong earnings growth: If a company is growing its earnings, but the stock price doesn’t reflect that growth, it could be undervalued.
Low price-to-earnings (P/E) ratio: This ratio compares the stock price to earnings. A low P/E might indicate that the stock is a bargain compared to others in the same industry.

How to Read Company Earnings Reports Like a Pro