What Is an Earnings Report and How to Read It

Companies issue information about earnings, often on a quarterly basis, through what’s known as an earnings report. These reports typically contain essential financial data and information about the business and its performance.

Learning how to understand an earnings report could give investors valuable information about the state of a company, and potentially help them make an informed decision about whether the company’s stock might be a worthwhile buy. Here’s how to read an earnings report.

What Are Earnings Reports?

An earnings report is a filing by a publicly traded company. Public companies are required to file quarterly (and annual) financial statements with the Securities and Exchange Commission (SEC).

Earnings reports detail a company’s revenues, earnings, cash flow, debt, and more. These reports typically provide a comprehensive look at a company’s financial performance.

Why Do Earnings Reports Matter?

Earnings reports are financial filings that keep shareholders and regulators apprised of the financial and legal standing of a company. Financial transparency may also allow current and potential investors, including those who do stock trading, to make decisions about the company through their own analysis and judgment.

Earnings reports contain information about company performance and critical metrics such as profits and revenue and how those metrics compare to previous quarters or years. They also generally include some guidance or comments from company leadership.

The Timing of Earnings Releases

Generally, an earnings report refers to the forms 10-Q and 10-K, which are quarterly and annual financial filings respectively. Both disclose a company’s revenue, expenses, profit, and other financial information.

What Information Is Contained in an Earnings Report?

Some earnings reports are more in-depth than others, but they tend to have some common elements. That includes an income statement, balance sheet, cash flow statement, and a statement of shareholder equity, which could be a breakdown of a company’s complete financial picture, along with assets and liabilities. In all, the report may be dozens of pages long.

Going deeper, here are some of the key elements.

Income Statement: Also sometimes referred to as a profit and loss statement, this covers how much money a company made over a period of time and its expenses. Usually, the current quarter’s information is compared to previous quarters or multiple quarters.

Balance Sheet: What a company owns and what they owe — its assets and liabilities.

Cash Flow Statement: This section details the exchange of money between the company and the outside world over a given period of time for things like operating activities, money spent on property or equipment, any debt that was repaid, and so on.

Statement of Shareholder Equity: This covers changes of ownership interest for the company’s shareholders over a given period of time. Here, you’ll find information on the value of all outstanding shares along with the potential dividend payment made by the company during the previous quarter(s).

For many investors, the income statement is of particular interest. This document details how much a company earns, how much it spends, and how profitable it is over a certain period of time. These numbers could reveal a lot about where a business is at and where they’re headed, which may be critical information to investors as they analyze a stock.

How to Understand Earnings Reports

Here’s what to know to help understand what an earnings report says.

Important Metrics to Watch

When reading an earnings report, it may be helpful to try and put the numbers in the report into context so that it may help individuals evaluate a stock.

Looking deeper at the financials, here are some key terms and items to look for, which are typically found in the income statement.

Revenue: A company’s sales. This is also known as the “top line,” because it sits at the top of the cash flow statement. This figure does not take into account the costs of running a business, so it may not be the best indicator as to the overall financial health of a company.

Cost of Revenue/Cost of Sales: Directly under the revenue or sales figure is a section that details the costs of producing the goods sold, such as production and manufacturing. To be clear, these are not all of the costs associated with running a business, only the costs directly associated with the sale of the product or service.

Below this figure, is the section referred to as “gross profit” or “gross margin,” which is the cost of revenue subtracted from the revenue. This figure is not net of all costs associated with running a business — only the costs associated with sales.

Operating Expenses: These are the costs of running a business that cannot necessarily be attributed to a company’s operations for a given period. Research and development, marketing expenses, and salaries of administrative personnel are all examples. Depreciation expenses, such as the wear and tear on assets such as machinery and tools or other assets that are used over long periods of time, may also be accounted for here.

At this point in the cash flow statement, a company may account for adjustments to income due to interest earnings or expenses or income taxes. Sometimes, this information is listed separately.

Earnings: This is a company’s profits, also known as the net income or “bottom line,” because earnings exist at the bottom of the cash flow statement after all costs are subtracted. This is the money that the company made in the previous quarter after all costs of running the business are accounted for. Typically, this is going to be the number of most interest to shareholders, as a profitable business model is what generally attracts investors.

Not all businesses are profitable all of the time, so it is possible that an earnings number may reflect a loss. When a company is recording a loss, the number is written inside of parentheses.

Earnings Per Share (EPS): While the earnings figure is important, it’s typically helpful to have some context as to what that means to investors. The EPS calculation divides the earnings figure by the number of outstanding shares to derive a figure that represents what it would look like if those earnings were to be evenly spread across all shareholders.

For example, an EPS number of $1 would indicate a $1 earning per share of outstanding stock. However, a $1 EPS does not necessarily mean that’s what the company pays out to each shareholder.

Instead, this financial ratio is a way for investors to compare profitability across businesses within the same industry, to a business’s past profitability, or to expectations for a company’s future profitability. It is typically used as a tool for analysis.

For a more qualitative look at a business, you could review the section typically titled Management’s Discussion and Analysis. Here, executives summarize both the numbers detailed in the financial statements and what’s going on in the business that might not be outwardly obvious simply by looking at the numbers. For example, executives might discuss a merger or other market factors that may have led to skewed numbers for that quarter.

Assessing Financial Risk Factors in Reports

All businesses face some sort of risk, whether it’s from growing competition in a specific sector, or increasing interest rates. Company leadership might discuss those risks in the commentary in an earnings release, or in an accompanying earnings call.

Other times, investors may be able to suss out potential risk in the numbers themselves (for example, are revenues in a specific area falling, and why?). If businesses are facing some sort of risk, investors may be able to find clues as to how big of a threat those risks might be as they read the filings.

The Earnings Season Explained

Investors are likely to become familiar with the term “earnings season” since it happens throughout a year and may impact the broader market.

What Is Earnings Season and Why Does It Matter?

Earnings season refers to the four times during the year on the earnings calendar when companies release quarterly earnings reports, and many of them tend to do so around the same time. As such, it’s a sort of “season,” as investors get to dig through several earnings reports and try to spot trends and make decisions regarding their portfolios.

The Impact of Earnings Reports on Stock Prices

Earnings season may be a volatile time for stock prices, as a company’s performance, put on paper and released to the world, allows everyone to see how it’s doing – and decide whether to buy, sell, or hold their stock. As such, an unexpected earnings report – good or bad – can create volatility in the stock market. That’s why investors will likely want to pay attention around earnings season.

Earnings Calls: What to Expect

Investors are usually able to take part in earnings calls, which often requires tuning in either online or by phone. While every earnings call is different, they generally tend to have the same elements: Company management (usually the CEO or another C-suite executive) discusses the top-line financial results for the period, and then discusses what’s ahead.

How to Read an Earnings Report

Reading an earnings report involves honing in on the most pertinent information and then synthesizing it into helpful insights.

Analyzing the Three Main Financial Statements

For most investors, the top-line financials are generally the most important things to check out in an earnings report. That includes:

•   Income statement: This typically contains the company’s revenue and expenses. It also usually has the EPS information and net income.

•   Balance sheet: This details the company’s assets and liabilities

•   Cash-flow statement: This statement details cash leaving and entering the business, including cash generated, cost of any property or equipment, money borrowed, and debt repaid,

Upcoming Earnings Report Calls: What to Anticipate

Companies generally announce earnings calls well in advance. That typically gives investors plenty of time to plan to attend — and to read financial media or analyst reports to get a sense of what to expect. Expectations are typically a significant element in the market, and even if a company reports strong numbers, those numbers may be below expectations, causing share values to fall.

Recommended: Stock Profit Calculator

Leveraging Earnings Reports

Earnings reports are tools that investors may use to hone in their investment strategy. But there are also other strategies that they might use during earnings season.

Strategies for Investors During Earnings Season

While some investors may find it profitable to use their investment platform to trade stock during earnings season, others may want to try and get a sense of where expectations lie, and position themselves accordingly. For instance, if expectations are that a company’s report will show it lost money, some investors may choose to sell their holdings, anticipating a fall in share prices the day earnings come out.

Others may opt to stick to a buy-and-hold strategy, and not let any market volatility – earnings-induced, or otherwise – change that strategy.

Things to Consider for Quarterly Reports

Considering top-line financial metrics and company leadership’s statements is important. But investors may also want to think about the context of the earnings report – which quarter, or time of the year is it covering, for instance. If a retail company reports strong Q4 earnings, for instance, that may have been influenced by the holiday shopping season.

Or, if a food company is struggling with higher costs during the summer, that might be because of a drought causing shortages. There are a variety of factors that may affect a company’s performance.

Using Earnings Reports to Forecast Market Trends

It may be tempting for investors to try and use earnings reports to forecast market trends, but it’s generally wise to tread carefully in this area. There might be some things to be gleaned from an earnings report about what the future holds for a company, but it’s difficult to predict what the market will do next.

The Takeaway

Earnings reports can be critical tools for investors, filled with comprehensive information about a company’s financial and business performance. Knowing how to read an earnings report may help an investor learn important information as they consider whether to purchase shares in a company.

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FAQ

What is a 10-Q versus a 10-K?

A 10-Q is a quarterly earnings report that updates a public company’s financial and business performance during that quarter, while a 10-K is a more comprehensive and detailed annual earnings report of the past year. Public companies are required to file both 10-Qs and 10-Ks by the Securities and Exchange Commission.

How do earnings reports impact the overall stock market?

Earnings reports might impact the overall stock market by detailing the performance and future outlook of public companies, which in turn, can affect investor behavior and potentially cause changes in trading. For example, if revenue and profit exceed expectations, confidence in a company may grow, investors may purchase more of its stock, and the price of the stock might rise. Conversely, if a company’s results fall short of expectations, investors may sell it, and its stock price may drop. One major company’s performance could also cause ripple effects across other companies in the same sector.

Can a company manipulate its earnings report?

It’s possible. Some companies might use a technique known as earnings management to present the company’s financials in a more favorable way. For example, they might use a legal form of earnings management, such as accounting practices that smooth out fluctuations in earnings and present more consistent profits. If a company changes their accounting practice from what they’ve done previously, they must disclose that information in their financial statement; it is often included as a footnote.

While some forms of earnings management are considered legal, earnings management done with deliberate deception and for the intention of misleading investors is considered fraudulent.

Where can you find a company’s earnings report?

You can typically find a company’s earnings report on their website in the “Investor Relations” or “Financials” section, or by using the search tool in the SEC’s EDGAR database.

What happens if a company misses its earnings estimates?

If a company misses its earnings estimates, its stock price often drops, and investors may frequently sell their shares. An earnings miss could serve as a negative signal to investors and the wider market, indicating that the company has underperformed relative to expectations.

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