If you thought you were done with reports when you finished school, think again …
If you want to be a savvy trader, you should know how to read and understand earnings reports.
Earnings reports provide amazing insight into a company’s overall financial health. They can also have a lot of weight on a stock’s price.
As a trader, earnings reports can be a valuable resource to help you analyze whether a company’s stock is a potentially worthwhile investment.
This post can help you decode the sometimes-confusing world of earnings reports. I’ll provide an overview of what they are, what to look for, and how to use the information you find to help with potential trades.
What Is an Earnings Report?
When most traders refer to earnings reports, they’re talking about quarterly earnings reports.
This report — which, as the name implies, is filed quarterly — is made public and offers an incredible resource for reviewing the company’s overall performance.
For a company, the earnings report is an extremely important release that can have a huge impact on their stock price. Usually, there are projections for what they hope to achieve during this time, which can be generated by the company and by analysts.
If they don’t meet the projected earnings, it can have a negative impact on the company. But if they exceed them, it can drive the stock price up. This can create great momentum for the stock.
So what does this big, important report include?
A quarterly report might include things like net income, net sales, earnings from operations, and the EPS (earnings per share). It also supplies updates of vital financial statements, including the income statement, balance sheet, and cash flow statement.
The earnings report might even include a side-by-side comparison so that you can compare the company’s earnings report for this quarter against previous quarters.
Regular readers of this blog likely know that I often refer to myself as a “glorified history teacher” because I’m obsessed with looking at a stock’s past in order to try to find patterns. This is how I try to make educated decisions about where stocks might go in the future. This type of comparison is extremely valuable!
But back to the quarterly earnings report. It might come with a personalized statement from a higher-up at the company (like the president or CEO) explaining the company’s progress, but sometimes this isn’t included.
Overall, the quarterly report lets potential investors see a snapshot of the company in the past quarter, including the sales, expenses, and overall income.
For investors, the quarterly earnings report is like a fundamental research bible. It’s a great way to help analyze a company’s health. Is it a worthwhile investment … or not?
The exact time and date of a company’s quarterly earnings report release can typically be found by contacting the company. They may even have an investor-relations webpage or team to contact. Don’t be shy about trying to find out when the report is coming out, because great traders always want to have an edge.
It’s important to note, though, that the earnings report isn’t the only thing to review. A few weeks after, something called the 10-Q filing is released. It’s another important report.
What Is a 10-Q Filing?
As important as the quarterly earnings report is, don’t just take it at its word.
While there are strict regulations on earnings reports and they’re generally trustworthy, the fact is that companies want to paint themselves in the most positive light.
Because of this, they may frame information in such a way that it puts a positive spin on their business even if it’s experiencing some issues. So it’s important to delve deep and also read the Form 10-Q.
This report is kind of like a cheat-sheet for fact-checking the quarterly earnings report and confirming the cold, hard facts.
It’s a form that’s legally required and must be filed with the SEC (Securities and Exchange Commission) every quarter.
Where the quarterly report can gloss over certain details, the 10-Q presents the information in a very black-and-white way. It’s a comprehensive report with details about the data contained in the quarterly earnings report, including the income statement, balance sheet, deficit for stockholders, and information about the company’s cash flow.
This report also includes details about the management’s analysis of the results and addresses risks in the market for the company and any notes about potential legal proceedings.
The 10-Q isn’t light reading — these documents are often more than 100 pages.
Because it’s dense material, companies often issue press releases about the 10-Q report. This boils it down to bullet points for investors, including the details that seem most salient or will sell the company better.
It can be appealing to just review the press release for the important points. However, the 10-Q is worth reviewing. It has a lot more weight because this is the stuff that couldn’t be rearranged or become misleading through careful editing. Put simply, it’s pretty safe to say that these are the real numbers.
Quarterly Earning Reports vs. Earning Reports
When most traders refer to earnings reports, they’re referring to the quarterly earnings report or the annual report. These are the reports that companies are required to release to the public.
The SEC requires companies to file quarterly earnings reports no later than 45 days following the end of the quarter, and the annual report must be filed no later than 90 days following the end of the fiscal year.
Stock Market Earnings Reports
The quarterly and annual reports are definitely the superstars of the earnings reports world. However, this doesn’t mean they’re the only stock market earnings reports. Companies can release information about their earnings at other times of the year.
They might issue press releases detailing earnings they’re angling for some sort of company restructuring or change like an acquisition or sale.
After Hours Earnings
After-hours earnings refer to the data of what happened after the market closed. These can be viewed in the morning. These are more about what has elapsed overnight and are not extremely comprehensive.
When is Earnings Season?
Ah, earnings season: the most wonderful time of the year!
Actually, the phrase ‘earnings season’ is a bit misleading since there are actually several of them throughout the year.
When you talk about earnings season, you’re talking about the times when the earnings reports are publicly released. Technically, a company has 45 days following the close of the quarter to make the filing.
However, usually, the big wave of quarterly earnings reports releases occurs the month following the end of the most recent fiscal quarter.
So if the fiscal quarter ends in December, March, June, and September, the earnings season(s) are January, April, July, and October.
This slight lag is due to the fact that companies need time to produce and create the reports. This time allows them to put all of the information in order and organize it to present to investors.
For traders, earnings season is always a very busy time of year. This is particularly true for those who take long positions, as it’s frequently the larger market-cap companies whose results set trends and move the market.
Financial advisors and analysts rely heavily on quarterly reports, too. They use them to make decisions about investments and to create estimates.
So, clearly, earnings season is a pivotal time in shaping the stock market in the months following.
The Components of the Quarterly Report
What’s in an earnings report? It typically follows a specific format, which goes like so:
The first part of the quarterly earnings report includes financial information. Here’s a review of some of the most important components:
Condensed Consolidated Financial Information
This is a summary of the company’s earnings statement, balance sheet, and cash flow statement. What are those? Here’s a quick guide:
- Earnings statement: Details the company’s earnings performance over the specific time period in the report.
- Balance sheet: Reports the company’s assets, shareholder equity, and any liabilities. Basically, it gives you an idea of what the company owns, and any outstanding items it owes on.
- Cash flow statement: Provides — you guessed it — information about the cash flow the company receives. This can be from both its ongoing business operations and investor sources.It also details cash going out, used to pay for business-related investments, and activities during the period of the report.
These statements allow you to gain an overview of the general financial status of the company. It condenses the information into an easier-to-digest format. However, it also removes a lot of the details and disclosures that you might find in a full financial statement, so the condensed financial statement provides more of an overview.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This mouthful of a component of the earnings report is also referred to as MD&A.
It’s the portion of a company’s earnings report where the higher-ups provide a synopsis of the previous year and how the company performed. This is presented in a way where they can also discuss their hopes about the present and for the future.
For example, they might explain changes, new products, goals, etc.
This is an important part of the earnings report because it gives you an idea of the company’s direction. You can do your own research about the trends it’s following, and the company’s potential trajectory.
Looking at the company’s past achievements and future goals can be helpful in deciding whether to trade a company’s stock.
Quantitative and Qualitative Disclosures About Market Risk
This is a requirement in the earnings report. The SEC requires that the company provide policy disclosures about market risk. This can help you navigate circumstances that could create volatility in the stock.
They can choose from a few different disclosure alternatives, such as:
- A presentation of contract terms or fair-value information that’s relevant for helping to determine future cash flow.
- Analysis providing information on the potential value loss based on potential changes in the market (for instance, rising or falling interest rates).
- Analysis providing and estimating potential losses based on movements in the market, including how likely this is to occur.
These disclosures can be used to help investors determine what could happen to this company in the future. Using past data, it can give you some insight about future risk.
Controls and Procedures
This portion of the report refers to the specific methods and procedures utilized by the company to make sure that the financial statements and reports are accurate.
To clarify, this portion is not in and of itself a guarantee that the company is complying with the lawful regulations, but it’s a listing of what they’re doing in efforts to comply.
Here’s an overview of some of the other important portions of the earnings statement that traders should review.
This section of the report is where the company has to share any current legal proceedings, like outstanding lawsuits.
Now, a lawsuit might sound like really bad news. But if the company has an outstanding lawsuit, it doesn’t necessarily mean potential investors should shun them.
While it’s not unusual for a big company to have a legal battle here or there, be sure to find out more about the legal battle in question. While a small lawsuit may be commonplace, big lawsuits can have a negative impact on a stock’s performance.
This portion of the report addresses the potential risks the company in question might face in the future. This might be a new branch of the business, a change in the company structure, and so on.
Unregistered Sales of Equity Securities and Use of Proceeds
According to the instructions on the 10-Q paperwork, this is the portion 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.”
Per Business Dictionary, equity securities are defined as “Stock (shares) that represents ownership of a firm. Equity securities usually provide steady income as dividends but may fluctuate significantly in their market value with the ups and downs in the economic cycle and the fortunes of the issuing firm.”
On their 10-Q filing, a company must disclose any such shares.
Defaults Upon Senior Securities
This portion of the report is where the SEC demands that “If there has been any material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within 30 days, with respect to any indebtedness of the registrant or any of its significant subsidiaries, identify the indebtedness and state the nature of the default.”
According to Investopedia, a senior security is “In the event of a company’s bankruptcy or liquidation, a senior security is one that ranks highest in the order of repayment before other security holders receive a payout.”
These exhibits can be similar to what you might see in a TV courtroom drama. If the company needs to furnish any proof or evidence of anything in the report, this is the section where they supply the documentation.
Why Traders Need to Take a Closer Look at Earnings Announcements
At the end of every quarter, both investors and analysts are sitting on the edge of their seats waiting for earnings season to begin. Really though, what do they hope to gain from it?
Impact of Companies Reporting Earnings Results in The Stock Market
Earnings reports are often among the largest catalysts for stock movement.
And when it comes to bigger stocks, earnings reports can truly rattle the market.
On the day the earnings reports are released, the stock market can be extremely busy, with stock prices having record highs and lows before things settle down.
Here’s a fun fact: If a company beats the earnings estimates per analyst estimates or even their own estimates, it tends to be an even bigger catalyst for the stock price to go up than the company earning more than their last year.
So if a company improved their sales since last year, yet failed to meet the estimates and projections of analysts, it can mean that people will rush to sell their shares. Interestingly, this leads to the idea that the estimates of the report can be just as important as the report.
Example of Earnings Reports Where Big Moves Happen
To look at an example of a big earnings winner, consider the case of Amazon.
On Business Insider, a recent profile on Amazon acts as a great example of an earnings report that caused a big move in the market.
According to the story, “Shares of Amazon are up 5.42% to $1,465.32 after reporting earnings of $3.75 per share compared to $1.83 that Wall Street was expecting. Earnings were boosted by a one-time $1.59 per share windfall from the new US tax law. The company reported revenue of $60.5 billion versus the $59.85 billion anticipated by Wall Street.”
As you can see, the fact that the reported earnings so far exceeded the projections of Wall Street was a huge positive catalyst.
Pair that with the fact that some larger companies like Microsoft and Facebook simultaneously experienced woes in their reporting, and all of a sudden Amazon looks incredible to investors.
Amazon CEO Jeff Bezos reported that the Alexa voice assistant service was a big reason for the success, along with its growing Amazon Web Services, which exceeded Google’s efforts in the same sector.
Invest in Your Education
Decoding earnings reports can be very helpful when choosing stocks to trade — but it’s only a part of the process.
To really understand what you can actually do with this information, you need to invest in your education.
By improving your knowledge of trading and the market, you can gain better insight on what to do with the information contained in earnings reports. It’s important to know how to look at the report for trends and information about moving forward.
My Trading Challenge was created to be the ultimate resource for traders to learn how to find their way in the ever-changing market.
While I focus on teaching my students the basics, the education I offer goes way beyond that. I want them to ultimately learn how to think for themselves so that they can continue to adapt to the market and react nimbly to things like earnings reports.
By joining my challenge, you can learn real-life skills about trading in an anecdotal way. I teach you what I learned the hard way, in hopes that it will hasten your learning curve.
The Bottom Line
Earnings reports, both annual and quarterly, can reveal a lot about a company’s financial health.
By learning how to read and evaluate earnings reports, you can gain a lot of insight about the company’s past, which can help you analyze what might be in store for a stock.
Overall, earnings reports can prove to be hefty resources for researching potential trades. Since they’re free and easy-to-obtain resources, it’s worthwhile to consult earnings reports before diving into trades.
Do you look at earnings reports in your research?