How to read an earnings report

Investor’s Edge makes it easy for you to stay on top of earnings for the stocks you hold in your portfolio, or for the companies you’re following. Here are a few things you should know about when to expect earnings and how to read an earnings report.

Public companies — companies that list their shares on a stock exchange or have filed a prospectus with the securities commission — are required to report financial performance on a regular basis. Financial performance includes revenue, expenses, profit and cash flow, along with discussion from management on the company’s results. Below are timelines of typical reporting requirements in North America:

Many companies report based on the calendar year, with quarters ending in March, June, September and December. Earnings reports come shortly after these dates, as outlined above. 

Not all companies report based on the calendar year. For example, the fiscal year of the Big Five Canadian banks runs from November 1 to October 31. These banks report based on their fiscal year, with quarters ending in January, April, July and October.

Next up, let’s review the key parts of an earnings report.

Revenue is also known as sales or the top line (since it appears as the top line on a company’s income statement, before expenses and other items are deducted). Revenue is the money a company receives from customers, in exchange for providing products and services. Investors often watch revenue closely, since declines or slowdowns in revenue can be an early warning sign about future profits.

Earnings are also known as profits or the bottom line (since earnings appear as the bottom line on a company’s income statement, after expenses and other items have been deducted). Earnings represent the profits made by the company. Current stock prices are largely based on projecting profits into the future, so investors typically pay close attention to earnings and anything that could affect a company’s future earnings.

Earnings per share is often called EPS for short. For investors, it’s not just earnings that matter but the amount of earnings they get for each share they own. Companies can reduce their share count (for example, through buying back shares) or increase their share count (for example, by issuing stock grants to executives). It’s possible for earnings to go up but EPS to go down, say when earnings increase by 4% but share count increases by 6%. This is called “dilution”, when the increase in share count dilutes the value of each share held by investors.

When companies release an earnings report, they may release “guidance” about what they expect for the future. Guidance is a broad statement about the trend of future performance, not a specific indication of expected revenue or earnings. Sometimes a company can perform well but still experience a drop in share price. This can happen because the company issues guidance that is less bullish than what investors expect. Again, markets are forward-looking. Share prices are only partly based on recent performance and largely based on what investors expect to happen in the future.

Investment firms employ stock market analysts to estimate revenue, earnings and EPS, which can help investors decide whether they want to invest in a company. The estimates of analysts often form a consensus or average range for expected EPS in the next quarter or year — and this consensus is typically reflected in the price of a stock. When a company’s results come in above consensus, this is an earnings “beat” and can be positive for the share price. When a company’s results come in below consensus, this is an earnings “miss” and can be negative for the share price.

While a company may issue broad guidance about its future performance and analysts provide specific estimates for revenues and earnings, big traders sometimes believe results will be quite different from this consensus. This unofficial “word on the street” can add an extra twist to share prices. Are the analysts right? Or do the big traders know something that analysts don’t? As investors follow a stock over time, they may become more experienced in interpreting estimates from analysts and traders — or even developing their own.

• Canadian and U.S. companies typically report earnings within 40 to 45 days of quarter-end or within 60 to 90 days of year-end. Many companies report earnings based on a calendar year but some report earnings on a different fiscal year.
• Key items on the earnings report are revenues, earnings and earnings per share (EPS). When a company’s EPS is better or worse than expected by analysts, this is an earnings “beat” or “miss”, which can affect the share price.
• Predicting future performance is important to investors. To this end, companies provide broad guidance; analysts provide specific estimates of revenues and earnings; and traders may have their own “word on the street” that can be different from both.