Being a good investor means being an informed investor. By learning to read an earnings report, you’re taking a solid step toward making smart decisions in the stock market.
TL;DR
- An earnings report tells you the overall economic health of a company, including how much money it made during a specific time period.
- Earnings reports can help you determine whether to buy, sell, or avoid a stock entirely.
- Earnings reports come out quarterly, and companies report them to the SEC via a 10-Q.
- The most important parts of an earnings report are the income statement, balance sheet, cash flow statement, and statement of shareholder equity.
- The press release and presentation deck portions of an earnings report can hold marketing bias, so do your due diligence and read the numbers.
- To gain more insight and add context to the numbers, you can join a company’s earnings call—a webcast or conference call led by company execs.
What is an earnings report?
When you invest in the stock market, you’re investing in a portion of a publicly-traded company. In order to be a publicly traded company, a business must file both quarterly and annual financial statements to the Securities and Exchange Commission (SEC). This financial statement is called a 10-Q, or earnings report.
An earnings report is a publicly-traded company’s outline of performance over the last quarter. It shows how the company has done financially and legally, which should give you a good indication of its economic health. Put more simply, it lets you know if the company is making money. This helps you decide when to invest, how much to invest or whether you should invest at all.
When you read an earnings report, you’ll often see three parts:
The first part is a press release with a few paragraphs on how the company has fared over the last quarter, as well as a section on economic data.
To make it more consumable for investors, these companies transform their 10-Q into a press release that shares significant parts of the earnings report. Some information in the press release includes revenue, net income, dividends and earnings per share. Here, you’ll also find a management discussion surrounding holistic financial conditions.
Another part of the report is a presentation deck that outlines the most positive financial data for the company during the last quarter.
This presentation is geared toward investors and works to visualize highlights and successes throughout the last quarter.
Finally, there’s the 10-Q, which is often long and shows a fluff-free version of the company’s financial data over the last quarter.
In the 10-Q, you’ll find an income statement, balance sheet, cash flow statement, and any market risks the company may be facing. It’s illegal for companies to fake numbers, but that’s not to say such instances don’t happen. In most cases, the 10-Q portion of the earnings report is the most telling section as it contains no marketing bias.
If you’re currently investing in a publicly-traded company—or planning to in the future—you should always take the press release and presentation deck of an earnings report with a grain of salt. They’re valuable documents that you definitely want to read, but they are marketing materials developed to promote investments. If you want a no-fluff display of economic health, head straight to the 10-Q.
When do companies report earnings?
Publicly-traded companies report their earnings to the SEC and investors every three months, or quarterly. Not every company has to report at the same time, though many submit during what’s commonly referred to as “earnings season.” This occurs at the end of the following months:
- March
- June
- September
- December
How to read an earnings report
Once a company submits their earnings reports to the SEC, the SEC publishes them through the EDGAR platform on their website. Use the search bar to find a specific company’s documents.
Here are the most important parts of any earnings report:
Income Statement
How much money did the company make within the last quarter? This is often noted in relation to one or more previous quarters. Within an income statement, you’ll find a few specific aspects:
- Revenue: AKA sales (you may hear people refer to this section as the “top line”)
- Cost of Revenue/Cost of Sales: This is the total cost of the good or service sold.
- Operating Expenses: These are the fees involved with running a business, aside from the COGS.
- Earnings: AKA profits, net income or “bottom line”. Basically, all the money the company made, after accounting for expenses. Oftentimes, companies experience a loss during a quarter. In that case, you’ll see the monetary value in parentheses.
- Earnings Per Share (EPS): This puts a company’s earnings into perspective for investors. To get this number, a company divides their earnings by the number of outstanding shares. The resulting value reflects what the earnings would look like if they were evenly spread out across all the company’s shareholders. It’s a way for investors to compare a business’ profitability against others in the industry.
Balance sheet
This balances a company’s assets and liabilities, AKA what they own versus what they owe.
Cash flow statement
This is where you’ll see how much money a company exchanges with others.
Statement of shareholder equity
What’s the value of all the company’s outstanding shares? What’s the potential dividend payment that the company will make? In other words, what’s the change in interest for their shareholders over the last quarter?
To get a fuller picture of a company’s financial standing, you can compare its most recent earnings report to the previous one. You can even go further by pitting the earnings report against earnings expectations to see if a company is on track according to their strategic business plan (that is, if they have one at all).
How earnings calls work
Numbers alone don’t always tell the whole story. That’s where earnings calls come into play.
Earnings calls are web or phone conferences led by publicly-traded companies to discuss earnings reports. They’re beneficial for investors because they meaningfully put the data into context. At the same time, they provide guidance for future investors and answer questions people may have surrounding the report.
Typically, companies use a press release to share upcoming earnings calls, which tend to take place shortly after their earnings report is published. Attendees typically include investors and stock market analysts.
Here’s a basic agenda for earnings calls:
To start the meeting, an Investor Relations Officer (IRO) delivers a liability-limiting statement in the event that actual numbers differ from those in the call. Then, the CEO or another executive discusses the financial results. Finally, the company gives way to a Q&A session for participants to take part in.
Upcoming earnings report calls
To learn about upcoming earnings report calls, check out the Nasdaq Earnings Calendar. The site showcases company calls on a daily basis. These calls occur Monday through Friday, and they take place pre-market, after hours or at an estimated time.
Within Public’s app, members can view upcoming earnings call dates for specific companies and even set calendar events to be reminded in advance.
Once you find a company call you want to attend, search the company’s investment-related press releases to find the link or dial-in number.
Bottom line
Earnings calls can feel daunting given the volume of information that they contain. Breaking them down into their key components: the 10Q, press release, and presentation materials, can help investors unpack the data being shared. While the press release and presentation might be illuminating in terms of a company’s marketing approach or strategic positioning, investors should pay the closest attention to the 10Q, which is a bare-bones look at the company’s financial performance over a given quarter.