How To Read An Earning's Report

April 17, 2022

How To Interpret an Earnings Report

There is a great deal of value in the ability to interpret an earnings report. Investors who take the time to scrutinize the form will gain insight into the company’s performance. Publicly traded companies are required by the SEC to report four times of the year by filing a 10-Q. It has multiple components including income statement, balance sheet, cash flow statement, and notes to financial statements. By reading these reports, investors can get a better understanding of the company’s financial status. When a company releases its earnings report, investors and analysts review it closely to see how the company is performing. The report typically contains information on revenue, expenses, profits, and losses. Here's a guide on how to read an earnings report so you can understand what's going on financially with the company.

How do you find a Company’s Form 10-Q?

There are two methods that are best practice for searching the internet for a company’s 10-Q. The SEC uses a system called EDGAR for company filings. You can follow the link below to get to EDGAR. You could also search for the company’s name plus “investor relations”. Most companies have their form 10-Q available on their websites.

https://www.sec.gov/edgar/searchedgar/companysearch.html

 

You will want to focus on the financial portions of the 10-Q as these sections will tell you how the company has performed the last quarter. Why review all the data if the company is a poor investment choice? You can analyze the other components of the report after you review the financial data.

When do companies report earnings?

10-Q should not be confused with 10-K. Form 10-K  is an annual report that is filed within 60days after the fiscal year ends where Form 10-Q is filed 40 days after the end of the quarter. Many companies file their earnings reports at the same time based off of dividing the calendar year into quarters. This time period when many companies are releasing their 10-Q’s at the same time is known as earnings season.

 

Income Statement

A company's income statement is one of the most important financial documents a business produces. The statement shows how much revenue a company generated over a specific period of time, as well as the expenses it incurred and the resulting profit or loss. While all businesses produce an income statement, not all companies use the same terminology on their statements. This can make deciphering an income statement difficult for financial outsiders. The total comprehensive income is the total income after all other factors have been adjusted.

Balance Sheet

What is a balance sheet and why is it important? A balance sheet is a financial statement that shows the company's assets, liabilities, and owner's equity at a specific point intime. The balance sheet is important because it provides a snapshot of the company's financial health. It can be used to measure how much debt the company has, assess liquidity risk, and identify potential risks and opportunities.  The balance sheet will always balance to the equation Assets= Liabilities + Stockholder’s Equity. This can be reviewed below on the Microsoft Corporation’s Balance Sheet. The balance sheet can be used to formulate multiple equations, but a more well-known and widely used equation is the debt-to-equity ratio. This ratio tells the investor how much debt the company has compared to its entirely owned funds. The calculation is Debt-to-Equity=Total Liabilities/ Total Stockholder’s Equity. If a high debt-to-equity ratio is determined, this means the company is funding growth with debt. Companies that have a high debt-to equity ratio may be at risk for default.

Cash Flow Statement

Creating and understanding a cash flow statement is an important part of financial management for any business. This document details all of the inflows and outflows of cash over a specific period of time, allowing you to get a clear picture of your company's current financial situation. It segments cash flow into the segments of operations, financing, and investing.  It can be used to help forecast future cash needs, make better investment decisions, and of utmost importance, it identifies how much cash is on hand.

 By analyzing the financials from the earnings report, it is important to note the following:

Revenue

In accordance with generally accepted accounting principles, a company's net income is computed by subtracting its expenses from its total revenues. The most common types of expenses are cost of goods sold, selling, general and administrative expenses, and interest expense. Net income is also referred to as the "bottom line" because it is the last item on the income statement.

When a company reports its earnings, it is usually referring to its net income. The term "earnings" can be used to refer to a company's net income, or it can be used to refer to the amount of money that a company pays out in dividends to its shareholders.

Expenses

The most common types of expenses are cost of goods sold, selling, general and administrative expenses, and interest expense.

Profits & Losses

A company's net income is computed by subtracting its expenses from its total revenues. The term "earnings" can be used to refer to a company's net income, or it can be used to refer to the amount of money that a company pays out in dividends to its shareholders. In order to make sure that you are understanding a company's financial statements correctly, it is important to know which definition of "earnings" is being used.

Earnings per Share

The earnings per share (EPS) ratio is a measure of a company's profitability. It is calculated by dividing a company's net income by the number of shares of stock outstanding.

The EPS ratio can be used to compare the profitability of different companies. It is also a popular metric for determining whether a company's stock is over- or under-valued.

Earnings report is the main component and the decisive element of the stock price. The stock price generally should reflect the of the company's revenue but other factors like the market sentiment bearish or bullish, sector might play a role in the short term in deciding the stock price of the company.

Of note, earnings reports also detail notes to the financial statements which are in depth assumptions made by accountants when preparing the income statement. It is important to understand that these notes are required because not all applicable financial information can be conveyed via financial statements. Management provides discussion within the report about the earnings results.

Once the financial data is evaluated, if the investor believes the company is worth pursuing, it will behoove the investor to review the financial risk factors section. If a company has a pending lawsuit, it may influence the overall financial health of the company. This section may include issues presenting from world events or potential threats. For example, Microsoft Corporation identified that in 2020 a cyberattack was uncovered that influenced the supply chain thus causing financial losses.

By being mindful of when companies are releasing their earnings reports, you can be better prepared to make sound financial decisions with your investments. Whether you’re a seasoned investor or just starting out, keep an eye on the Finance Greater earnings calendar.  It can be used as a great way to stay ahead of the curve and make more informed choices about whereto put your money. Reviewing earnings reports can seem tedious, but it is acritical process for all investors. By knowing when your company of choice is releasing their report, you can be better prepared to make sound financial decisions. Make sure to bookmark our weekly earnings calendar so that you always have the latest information at your fingertips! What company are you most interested in following and why? Let us know in the comments below!