What an earnings report is, and how to read one in five minutes
Public companies report their results every three months. Here are the few numbers that matter most, and why shares can fall even on good results.
Every three months, public companies tell investors how their business did. This is the earnings report. A company's shares can jump or drop sharply on the day it comes out. You do not need to read every page to understand the main points.
What it is
Companies listed on a stock exchange must report their results four times a year. Each three-month period is called a quarter. The report includes sales, costs and profit, plus comments from management.
In the US, companies file these reports with the Securities and Exchange Commission. In Canada, they file with the provincial securities regulators.
Most companies also hold a call with analysts on the same day, where executives answer questions.
The five-minute read
1. Revenue
Revenue is the total money the company took in from sales. It is the "top line". Check whether it grew compared with the same quarter a year earlier.
2. Earnings per share
Earnings per share, or EPS, is the profit divided by the number of shares. It is the "bottom line". It is also the profit figure used in the P/E ratio.
Companies often show two versions. One follows the official accounting rules. The other, often called "adjusted", leaves out some costs the company considers one-off. The adjusted figure is usually higher.
3. Compared with expectations
Analysts publish forecasts for revenue and EPS before the report. The average is called the consensus. A "beat" means the result came in above it. A "miss" means below.
4. Guidance
Guidance is what the company says it expects for the coming quarter or year. It often matters more than past results, because share prices follow expected future profits.
5. Profit margin
The margin is the share of revenue left as profit. If a company earns $10 of profit on $100 of sales, its margin is 10%. A rising margin means the business is keeping more of each sale.
Why shares can fall on good news
A company can report record profit and still see its shares drop. Common reasons:
- Investors expected even more than the consensus.
- Guidance for the next quarter was weak.
- Costs are rising faster than sales.
The short version
- Earnings reports come out every quarter.
- Check revenue, earnings per share and the outlook first.
- Results are judged against what analysts expected.
- Guidance about the future often moves shares more than past results.
This is general information, not investment advice.
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