Summary of Quarterly Earnings Reports
Just as the name suggests, a quarterly earnings report is an earnings report, issued by publicly traded companies every quarter. These reports are essentially just the company’s financial statement which lists out a variety of data such as their quarterly revenue, sales volume, and profit margins to show the profits or losses that the company has fared.
A publicly traded company is one that is listed on a stock exchange. The reason that these companies must disclose their financial details is so that shareholders and potential investors can gain insights into the stock they are purchasing.
At the end of the company’s fiscal year, they will then have to provide an annual earnings report. This report will give an overview of the company’s financials over the past year. The annual report is broken down into quarters and compares their financial statements to that of previous years to highlight their growth to investors.
Webull is one of my favourite platforms for keeping me up to date with earning report timelines. One of Webull’s features is an ‘earning’s calendar,’ which keeps track of what dates companies will be releasing their earnings report. The calendar also includes the last stock price and the earnings per share (EPS) estimate.
A Breakdown of All of the Components of an Earnings Report
Although they may seem daunting, earnings are straightforward once you understand the simple formula, they follow every single time. Every earnings report is made up of 4 key components which the shareholders and investors are seeking access to. These 4 components include the press release (or letter), the financial statements, guidance, and data. These 4 pieces of the report will provide a bird’s eye view of the company’s financials. Although this may seem straightforward, let’s break it down a little bit further:
• Press release (or letter)
Quarterly earnings reports will often begin with a press release or a letter to the shareholders. This letter provides the company a place with the most critical financial information that would potentially excite an investor. This section of the earnings report will also give the company the opportunity to discuss the company’s future plans for adopting new technologies, expanding, partnering etc. Pretty much anything that may be beneficial for an investor to see will be included in this letter.
• Financial statements
This section of the company’s earnings report will include an in-depth overview of the financials. The financial statement is broken up into 5 key parts, which include the following:
○ Net revenue: Net revenue refers to what you would get when you take the gross revenue and minus the cost of goods sold.
○ Gross profit: Gross profit can also be referred to as gross income. Gross profit is a company’s profits AFTER they have subtracted the costs of producing and distributing their products.
○ Net income: Net income is also referred to as net earnings. Net income is the company’s sales minus the cost of goods sold, general expenses, taxes, and interest.
○ Earnings per share: The earnings per share can be calculated by the company’s total earnings divided by the outstanding shares. More specifically, EPS is used to aid shareholders in understanding the overall impact of a company’s current earnings to estimate the true value of the company’s shares.
○ Dividends: On the financial statement, dividends are referring to the amount of money that the company has paid out to its shareholders, as a fixed amount per share. Note that not all company’s pay dividends.
This section may not always be included in the earnings report, but many companies will provide key statistics for the upcoming quarter or sometimes for the upcoming year. These stats will generally only be given if it will enhance the company’s look to investors.
• Company data
The company data section is a requirement and will often include information pertaining to the company’s board of directors or their compensation details, market risk exposures and any relevant accounting practices.
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Why Are Earnings Reports So Important?
Earnings reports are what will make or break a company’s reputation in the stock market. The reason that these reports are so important is because investors rely on them to assess whether the company has been fairly valued and whether it will continue to perform well into the future.
Here is a timeline of how this process is played out:
Financial analysts will make estimates about how a company will perform financially before their earnings reports come out. They do this by calculating various financial ratios such as profitability and debt ratios and comparing them to other companies or to the past performance of the company being evaluated.
Investors will then use the analysts’ findings when the earnings reports come out to compare the estimates to the company’s true results. These findings will do one of two things:
- Prove the analysts’ findings to be true
- Refute the analysts’ expectations
The analysts will then have the opportunity to upgrade, downgrade or maintain their previous findings of that same company to solidify their professional opinions regarding how well they think the stock will perform in the coming months.
Once again, the investors will use all of this information to make their own financial decisions.
On a broader scale, many people will also use earnings reports from the S&P 500 to simply gain valuable insight regarding the overall health of the current economy. This will aid individuals in deciding what sectors they may invest in that year.
Limitations of Quarterly Earnings Report
Although earnings reports are often so eagerly awaited by investors, they can often be misleading by hiding certain key information or projecting lower estimates than what they should be. Companies will do this to look as though they have outperformed their projections by producing greater-than-anticipated results to impress the investors. This is referred to as “sandbagging.”
There are some scenarios where investors will call the bluff of a company that is “sandbagging,” and it will completely backfire on them by causing the price of their stock to fall. If a company is known for sandbagging, analysts will also often pick up on it and control it in their estimates.
With all that being said, this is why it is so important to educate yourself on investing before diving in too deep.
If you’re not sure where to get started on your investing journey, be sure to check out M1 Finance.
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What is “Earnings Season?
Earnings season is roughly a 6-week period (45 days) where companies will have to disclose all earnings reports for the quarter they are currently in. The following list will give you a better sense of when each quarter begins and ends.
- Begins mid-April
- Ends mid-May
- Begins mid-July
- Ends mid-August
- Begins mid-October
- Ends mid-November
- Begins mid-January
- Ends mid-February
As previously mentioned, you may want to consider making your life easier by downloading Webull. Webull provides an earnings calendar, which lays out the specific dates that the publicly traded companies will be releasing their earnings each quarter. When you’re trying to keep track of multiple companies, it’s nice to have them all nicely laid out and organized in front of you.
Will you start paying more attention to earnings reports?
As we have just discussed, earnings reports can be incredibly useful not only to experienced investors, but also to the public to get a sense of the economy’s health as well as interesting information regarding their favourite companies.
If you are someone who has previously not bothered to look at earnings reports before investing and you think you might start, here’s a brief rundown of what to look for:
- If a company’s earnings report is looking a lot better than the analysts’ predictions, but the stock price has not yet risen accordingly, you might want to consider buying. Before doing so – make sure to research other stock indicators as well to solidify your purchase decision.
- If a company’s earnings report is somewhat better than the analysts estimates, but the stock price has already shot up far higher than it should have any other day, you may want to consider short selling. Again, research alternative indicators before making your final decision.
- If a company’s earnings report is far worse than the analysts had estimated, but the stock price has still gone up, you may want to consider short selling. Again, please gather further evidence and research before making your decision.
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About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.