So, what’s an Earnings Report?
Well, an earnings report is a formal financial document published by public companies usually on a quarterly basis containing items such the net income, earnings per share, expenses, and the net sales.
Publicly traded companies produce their earnings report on a quarterly. By doing so, investors can be able to analyze the reports and gauge the financial health of any given company.
According to fundamental analysts, good investments can be identified by conducting a ratio and performance analysis. Rather than relying on a single earnings report, a keen interest is always paid to the pattern in ratios derived from quarterly earnings’ reports over time.
An example of a common ratio when it comes to analyzing an investment is the earnings per share. Let’s consider the earnings per share for Amazon over the last four quarters.
Amazon Quarterly Earnings History
| Fiscal Quarter Ending | Projected Earnings per Share | ||
| Jun2018 | 2.49 | ||
| Mar2018 | 1.22 | ||
| Dec2017 | 1.85 | ||
| Sep2017 | 0.01 |
From the above information, the company had forecasted Earnings per Share of $2.49 in the quarter ending June 2018; however, they ended up with even better results prompting them to issue $5.07 per share surpassing the set target by a margin of 103.61%. This is a typical example of the kind of information that can be extracted from the Earnings Report over time to help investors make sound investment decisions.
Contents of an Earnings Report
Earnings Report contains financial information that reflects a company’s status at a given time. Essentially, the report is divided into two parts:
Part 1.Financial Information
This section contains items such as:
- Item 1. Financial Statements
- Item 2. Management’s Discussion and Analysis of the financial condition and results of the operation
- Item 3. Qualitative and quantitative disclosures about market risk
- Item 4. Controls and Procedures.
Part 2.Other Information
Other information contained in the report includes:
- Item 1. Legal proceedings
- Item 1A. Risk factors
- Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- Item 3. Defaults upon Senior Securities
- Item 4. (Removed and reserved)
- Item 5. Other Information
- Item 6. Exhibits.
The two parts (1&2) essentially make up an Earnings Report.
What should you look out for in an Earnings Report?
As much as the entire Earnings Report is important to an investor, certain areas of the report are considered to be of greater importance to potential investors. Here are the six key areas to look out for in an Earnings Report.
Earnings
Earnings represent the profits of a company for a certain period of time—it is one of the most important metrics when analyzing a company’s financial status. Earnings indicate a company’s profitability.
Revenues
Revenue figures are a vital detail in a company’s earnings report. When revenues increase, earnings typically increase. However, in very rare circumstances, revenues may be reported to be low while the earnings remain high.
Expenses
These are costs associated with operating the business and may include salaries and wages, leases, depreciation, and so on. As a company grows, it is normal for expenses to shoot up, but in a steady manner. On the other hand, when expenses drastically increase more than revenue or profits, then this is a sure red flag of a company that is not doing so well.
Earnings per Share (EPS)
EPS is an essential tool used to determine the price of a share. Basically, Earnings per Share represent the proportion of a company’s profit allocated to each share. EPS is calculated as Net Income — Preferred Stock ÷ Average Outstanding Shares.
Management’s Discussion and Analysis
This item depicts the management’s opinion on the financial status of the company. The opinion could be an overview comparison of the past and the most recent quarter, risks that the company may be facing, as well as forward-looking statements. Also, a number of CEOs provide their take on the future of the company. The appraisals at this stage, whether positive or negative, could have an instant effect on the price of the company’s stocks.
Risk Factors
In Part 2 of the Earnings Report, Risk Factors indicate any unusual risks which may render the company vulnerable—such risks may be associated with proposed changes in the governance structure or risks associated with new business activities. Notable, is the fact that a decent number of analysts have been known to exclude extraordinary events such as natural disasters in the risks category as they are unlikely to take place.
The Bottom Line
While individual parameters such as revenues, earnings, or expenses are great performance measurement tools, it is essential to compare such information with data from the previous quarters or years.
A company is considered to be a work in progress—gauging the performance of a company over time can reveal the true and fair view of its financial health and by extension, its investment viability.
