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Dec

2024

The Ultimate List of Financial Ratios

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Financial ratios are numerical calculations that illustrate the relationship between one piece or group of data and another. Business owners use financial statement ratios to performance, assess risk and guide decision-making. For investors, these calculations can provide meaningful data that reflects a company’s liquidity and financial health.

The use of financial ratios is often central to a quantitative or fundamental analysis approach, though they can also be used for technical analysis. For example, a value investor may use certain types of financial ratios to indicate whether the market has undervalued a company or how much potential its stock has for long-term price appreciation. Meanwhile, a trend trader may check key financial ratios to determine if a current pricing trend is likely to hold.

With either strategy, informed investors must understand the different kinds of commonly used financial ratios, and how to interpret them.

Key Points

• Financial ratios serve as essential tools for evaluating a company’s performance, risk, and overall financial health, assisting both business owners and investors in decision-making.

• Key financial ratios include Earnings Per Share (EPS), Price-to-Earnings (P/E), and Debt to Equity (D/E), each providing insights into profitability, valuation, and leverage.

• Liquidity ratios, such as the Current Ratio and Quick Ratio, help assess a company’s ability to meet short-term obligations, crucial for evaluating newer firms.

• Profitability ratios, including Gross Margin and Return on Assets, gauge how effectively a company generates income from its operations and assets.

• Coverage ratios, like the Debt Service Coverage Ratio and Interest Coverage Ratio, measure a company’s capacity to manage its debt obligations, providing insights into financial stability.

What Are Financial Ratios?

A financial ratio is a means of expressing the relationship between two pieces of numerical data. When discussing ratios in a business or investment setting, you’re typically talking about information that’s included in a company’s financial statements.

Recommended: How to Read Financial Statements

Financial ratios can provide insight into a company, in terms of things like valuation, revenues, and profitability. They can also aid in comparing two companies.

For example, say you’re considering investing in the tech sector, and you are evaluating two potential companies. One has a share price of $10 while the other has a share price of $55. Basing your decision solely on price alone could be a mistake if you don’t understand what’s driving share prices or how the market values each company. That’s where financial ratios become useful for understanding a company’s inner workings.

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Key Financial Ratios

Investors tend to use some financial ratios more often or place more significance on certain ratios when evaluating business or companies. Here are some of the most important financial ratios to know.

1. Earnings Per Share (EPS)

Earnings per share or EPS measures earnings and profitability. This metric can tell you how likely a company is to generate profits for its investors. A higher EPS typically indicates better profitability, though this rule works best when making apples-to-apples comparisons for companies within the same industry.

EPS Formula:

EPS = Net profit / Number of common shares

To find net profit, you’d subtract total expenses from total revenue. (Investors might also refer to net profit as net income.)

EPS Example:

So, assume a company has a net profit of $2 million, with 12,000,000 shares outstanding. Following the EPS formula, the earnings per share works out to $0.166.

2. Price-to-Earnings (P/E)

Price-to-earnings ratio or P/E helps investors determine whether a company’s stock price is low or high compared to other companies or to its own past performance. More specifically, the price-to-earnings ratio can give you a sense of how expensive a stock is relative to its competitors, or how the stock’s price is trending over time.

P/E Formula:

P/E = Current stock price / Current earnings per share

P/E Example:

Here’s how it works: A company’s stock is trading at $50 per share. Its EPS for the past 12 months averaged $5. The price-to-earnings ratio works out to 10, meaning investors would have to spend $10 for every dollar generated in annual earnings.

3. Debt to Equity (D/E)

Debt to equity or D/E is a leverage ratio. This ratio tells investors how much debt a company has in relation to how much equity it holds.

D/E Formula:

D/E = Total liabilities / Shareholders equity

In this formula, liabilities represent money the company owes. Equity represents assets minus liabilities or the company’s book value.

D/E Example:

Say a company has $5 million in debt and $10 million in shareholder equity. Its debt-to-equity ratio would be 0.5. As a general rule, a lower debt to equity ratio is better as it means the company has fewer debt obligations.

4. Return on Equity (ROE)

Return on equity or ROE is another financial ratio that’s used to measure profitability. In simple terms, it’s used to illustrate the return on shareholder equity based on how a company spends its money.

ROE Formula:

ROE = Net income – Preferred dividends / Value of average common equity

ROE Example:

Assume a company has net income of $2 million and pays out preferred dividends of $200,000. The total value of common equity is $10 million. Using the formula, return on equity would equal 0.18 or 18%. A higher ROE means the company generates more profits.

Liquidity Ratios

Liquidity ratios can give you an idea of how easily a company can pay its debts and other liabilities. In other words, liquidity ratios indicate cash flow strength. That can be especially important when considering newer companies, which may face more significant cash flow challenges compared to established companies.

5. Current Ratio

Also known as the working-capital ratio, the current ratio tells you how likely a company is able to meet its financial obligations for the next 12 months. You might check this ratio if you’re interested in whether a company has enough assets to pay off short-term liabilities.

Formula:

Current Ratio = Current Assets / Current Liabilities

Example:

Say a company has $1 million in current assets and $500,000 in current liabilities. It has a current ratio of 2, meaning for every $1 a company has in current liabilities it has $2 in current assets.

6. Quick Ratio

The quick ratio, also called the acid-test ratio, measures liquidity based on assets and liabilities. But it deducts the value of inventory from these calculations.

Formula:

Quick Ratio = Current Assets – Inventory / Current Liabilities

Example:

Quick ratio is also useful for determining how easily a company can pay its debts. For example, say a company has current assets of $5 million, inventory of $1 million and current liabilities of $500,000. Its quick ratio would be 8, so for every $1 in liabilities the company has $8 in assets.

7. Cash Ratio

A cash ratio tells you how much cash a company has on hand, relative to its total liabilities. Essentially, it tells you how easily a company could pay its liabilities with cash.

Formula:

Cash Ratio = (Cash + Cash Equivalents) / Total Current Liabilities

Example:

A company that has $100,000 in cash and $500,000 in current liabilities would have a cash ratio of 0.2. That means it has enough cash on hand to pay 20% of its current liabilities.

8. Operating Cash Flow Ratio

Operating cash flow can tell you how much cash flow a business generates in a given time frame. This financial ratio is useful for determining how much cash a business has on hand at any given time that it can use to pay off its liabilities.

To calculate the operating cash flow ratio you’ll first need to determine its operating cash flow:

Operating Cash Flow = Net Income + Changes in Assets & Liabilities + Non-cash Expenses – Increase in Working Capital

Then, you calculate the cash flow ratio using this formula:

Formula:

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

Example:

For example, if a company has an operating cash flow of $1 million and current liabilities of $250,000, you could calculate that it has an operating cash flow ratio of 4, which means it has $4 in operating cash flow for every $1 of liabilities.

Solvency Ratios

Solvency ratios are financial ratios used to measure a company’s ability to pay its debts over the long term. As an investor, you might be interested in solvency ratios if you think a company may have too much debt or be a potential candidate for a bankruptcy filing. Solvency ratios can also be referred to as leverage ratios.

Debt to equity is a key financial ratio used to measure solvency, though there are other leverage ratios that are helpful as well.

9. Debt Ratio

A company’s debt ratio measures the relationship between its debts and its assets. For instance, you might use a debt ratio to gauge whether a company could pay off its debts with the assets it has currently.

Formula:

Debt Ratio = Total Liabilities / Total Assets

Example:

The lower this number is the better in terms of risk. A lower debt ratio means a company has less relative debt. So a company that has $25,000 in debt and $100,000 in assets, for example, would have a debt ratio of 0.25. Investors typically consider anything below 0.5 a lower risk.

10. Equity Ratio

Equity ratio is a measure of solvency based on assets and total equity. This ratio can tell you how much of the company is owned by investors and how much of it is leveraged by debt.

Formula:

Equity Ratio = Total Equity / Total Assets

Example:

Investors typically favor a higher equity ratio, as it means the company’s shareholders are more heavily invested and the business isn’t bogged down by debt. So, for example, a company with $200,000 in total equity and $200,000 in total assets has an equity ratio of 0.80. This tells you shareholders own 80% of the company.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Profitability Ratios

Profitability ratios gauge a company’s ability to generate income from sales, balance sheet assets, operations and shareholder’s equity. In other words, how likely is the company to be able to turn a profit?

Return on equity is one profitability ratio investors can use. You can also try these financial ratios for estimating profitability.

11. Gross Margin Ratio

Gross margin ratio compares a company’s gross margin to its net sales. This tells you how much profit a company makes from selling its goods and services after the cost of goods sold is factored in.

Formula:

Gross Margin Ratio = Gross Margin / Net Sales

Example

A company that has a gross margin of $250,000 and $1 million in net sales has a gross margin ratio of 25%. Meanwhile, a company with a $250,000 gross margin and $2 million in net sales has a gross margin ratio of 12.5% and realizes a smaller profit percentage per sale.

12. Operating-Margin Ratio

Operating-margin ratio measures how much total revenue is composed of operating income, or how much revenue a company has after its operating costs.

Formula:

Operating Margin Ratio = Operating Income / Net Sales

Example:

A higher operating-margin ratio suggests a more financially stable company with enough operating income to cover its operating costs. For example, if operating income is $250,000 and net sales are $500,000, that means 50 cents per dollar of sales goes toward variable costs.

13. Return on Assets Ratio

Return on assets or ROA measures net income produced by a company’s total assets. This lets you see how good a company is at using its assets to generate income.

Formula:

Return on Assets = Net Income / Average Total Assets

Example:

Investors typically favor a higher ratio as it shows that the company may be better at using its assets to generate income. For example, a company that has $10 million in net income and $2 million in average total assets generates $5 in income per $1 of assets.

Efficiency Ratios

Efficiency ratios or financial activity ratios give you a sense of how thoroughly a company is using the assets and resources it has on hand. In other words, they can tell you if a company is using its assets efficiently or not.

14. Asset Turnover Ratio

Asset turnover ratio is a way to see how much sales a company can generate from its assets.

Formula:

Asset Turnover Ratio = Net Sales / Average Total Assets

A higher asset turnover ratio is typically better, as it indicates greater efficiency in terms of how assets are being used to produce sales.

Example:

Say a company has $500,000 in net sales and $50,000 in average total assets. Their asset turnover ratio is 10, meaning every dollar in assets generates $10 in sales.

15. Inventory Turnover Ratio

Inventory turnover ratio illustrates how often a company turns over its inventory. Specifically, how many times a company sells and replaces its inventory in a given time frame.

Formula:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Example:

Investors use average inventory since a company’s inventory can increase or decrease throughout the year as demand ebbs and flows. As an example, if a company has a cost of goods sold equal to $1 million and average inventory of $500,000, its inventory turnover ratio is 2. That means it turns over inventory twice a year.

16. Receivables Turnover Ratio

Receivables turnover ratio measures how well companies manage their accounts receivable. Specifically, it considers how long it takes companies to collect on outstanding receivables.

Formula:

Receivables Turnover Ratio = Net Annual Credit Sales / Average Accounts Receivable

Example:

If a company has $100,000 in net annual credit sales, for example, and $15,000 in average accounts receivable its receivables turnover ratio is 6.67. The higher the number is, the better, since it indicates the business is more efficient at getting customers to pay up.

Coverage Ratios

Coverage ratios are financial ratios that measure how well a company manages its obligations to suppliers, creditors, and anyone else to whom it owes money. Lenders may use coverage ratios to determine a business’s ability to pay back the money it borrows.

17. Debt Service Coverage Ratio

Debt service coverage reflects whether a company can pay all of its debts, including interest and principal, at any given time. This ratio can offer creditors insight into a company’s cash flow and debt situation.

Formula:

Debt Service Coverage Ratio = Operating Income / Total Debt Service Costs

Example:

A ratio above 1 means the company has more than enough money to meet its debt servicing needs. A ratio equal to 1 means its operating income and debt service costs are the same. A ratio below 1 indicates that the company doesn’t have enough operating income to meet its debt service costs.

18. Interest Coverage Ratio

Interest-coverage ratio is a financial ratio that can tell you whether a company is able to pay interest on its debt obligations on time. This is also called the times earned interest ratio.

Formula:

Interest Coverage Ratio = EBIT ( Earnings Before Interest and Taxes) / Annual Interest Expense

Example:

Let’s say a company has an EBIT of $100,000. Meanwhile, annual interest expense is $25,000. That results in an interest coverage ratio of 4, which means the company has four times more earnings than interest payments.

19. Asset-Coverage Ratio

Asset-coverage ratio measures risk by determining how much of a company’s assets would need to be sold to cover its debts. This can give you an idea of a company’s financial stability overall.

Formula:

Asset Coverage Ratio = (Total Assets – Intangible Assets) – (Current Liabilities – Short-term Debt) / Total Debt

You can find all of this information on a company’s balance sheet. The rules for interpreting asset coverage ratio are similar to the ones for debt service coverage ratio.

So a ratio of 1 or higher would suggest the company has sufficient assets to cover its debts. A ratio of 1 would suggest that assets and liabilities are equal. A ratio below 1 means the company doesn’t have enough assets to cover its debts.

Market-Prospect Ratios

Market-prospect ratios make it easier to compare the stock price of a publicly traded company with other financial ratios. These ratios can help analyze trends in stock price movements over time. Earnings per share and price-to-earnings are two examples of market prospect ratios. Investors can also look to dividend payout ratios and dividend yield to judge market prospects.

20. Dividend Payout Ratio

Dividend payout ratio can tell you how much of a company’s net income it pays out to investors as dividends during a specific time period. It’s the balance between the profits passed on to shareholders as dividends and the profits the company keeps.

Formula:

Dividend Payout Ratio = Total Dividends / Net Income

Example:

A company that pays out $1 million in total dividends and has a net income of $5 million has a dividend payout ratio of 0.2. That means 20% of net income goes to shareholders.

21. Dividend Yield

Dividend yield is a financial ratio that tracks how much cash dividends are paid out to common stock shareholders, relative to the market value per share. Investors use this metric to determine how much an investment generates in dividends.

Formula:

Dividend Yield = Cash Dividends Per Share / Market Value Per Share

Example:

For example, a company that pays out $5 in cash dividends per share for shares valued at $50 each are offering investors a dividend yield of 10%.

Ratio Analysis: What Do Financial Ratios Tell You?

Financial statement ratios can be helpful when analyzing stocks. The various formulas included on this financial ratios list offer insight into a company’s profitability, cash flow, debts and assets, all of which can help you form a more complete picture of its overall health. That’s important if you tend to lean toward a fundamental analysis approach for choosing stocks.

Using financial ratios can also give you an idea of how much risk you might be taking on with a particular company, based on how well it manages its financial obligations. You can use these ratios to select companies that align with your risk tolerance and desired return profile.

The Takeaway

Learning the basics of key financial ratios can be a huge help when constructing a stock portfolio. Rather than focusing on a stock’s price, you can use financial ratios to take a closer look under the hood of a company.

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Dec

2024

History of IPOs That Failed

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

An initial public offering or IPO represents a company’s first foray into the world of publicly traded stock. While an IPO can be highly anticipated by the company, prospective investors, and the market, success isn’t guaranteed.

In some cases, an IPO flops, which can raise questions about the company’s long-term viability. While a failed IPO isn’t a guarantee that a company won’t succeed, it can make establishing a firm footing in the marketplace more challenging.

What Happens During the IPO Process?

An initial public offering, or IPO, is the first time that shares of a company are offered for sale to the public. Once an IPO occurs, company stock is listed on a stock exchange and is available for pretty much anyone to buy. That said, shares can be limited, and individual investors may face certain restrictions or availability issues when it comes to trading IPO shares.

Before the IPO, the company is considered to be private. Private companies may still have shareholders, but it’s often a relatively small circle that may include founders, early employees, or even private investors such as venture capitalists.

To have an IPO, a company must file a prospectus with the SEC. The company will use the prospectus to solicit investors, and it includes key information like the terms of the securities offered and the business’s overall financial condition.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

Behind the Scenes of an IPO

Behind the scenes, companies typically hire investment bankers and lawyers to help them with the IPO process. The investment bankers act as underwriters, or buyers of the shares from the company before transferring them to the public market. The underwriters at the investment bank help the company determine the offering price, the number of shares that will be offered, and other relevant details.

The company will also apply to list their stock on one of the different stock exchanges, like the New York Stock Exchange or Nasdaq Stock Exchange.

What Does It Mean When an IPO Fails?

When an IPO flops, it usually means that the stock’s price dips below the initial opening price set on the first day of trading.

Trading may pick up again the next day, resulting in a jump in the share price, or it may continue to flatline — or, in a worst-case scenario, it might hit rock bottom. There are different reasons why this can happen but it is disappointing to company executives as well as investors who were banking on the IPO being a winner. Despite all the hype around IPOs in recent years, there are no guarantees.

An IPO failure can also refer to a planned IPO that gets scuttled at the last minute due to problems with the company or a lack of interest from the investor community.

Knowing about failed IPOs can be useful for investors, who may benefit from a cautionary tale or too before investing in the next “big thing.”

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10 of the Biggest IPO Failures in History

Throughout IPO history, there are some IPOs that failed more spectacularly than others. The following list is in chronological order.

1. TheGlobe.com

TheGlobe’s IPO flop in 1998 is one of the worst of the dotcom-bubble era and in IPO history overall. The company’s stock jumped an astonishing 600% on the first day of trading, raising $27.9 million in its IPO. But less than two years later, the NYSE delisted the stock after it fell below $1 per share.

2. Pets.com

Pets.com’s IPO makes the list of worst IPOs in history largely because of how quickly the company’s downfall happened. After raising $82.5 million in its February 2000 IPO, the company filed for bankruptcy a mere nine months later.

3. Vonage

Vonage’s IPO in May 2006 was so bad that the company was eventually sued over it, and three U.S. investment banks received fines from the Financial Industry Regulatory Authority (FINRA) in connection with the IPO. After falling short of the initial $17 price point, share prices continued to tumble, eventually bottoming out in the peak of the Great Recession at under $0.50 per share.

4. Omeros

Biotech company Omeros was one of the worst IPO flops of 2009. The company saw its stock price decline 36% in the worst two weeks of trading alone. Over the years, the company’s share price has see-sawed, most recently dropping below $10 per share in October 2021 and hovering there through the beginning of 2022.

5. Etsy

Etsy ended up being one of the worst IPOs of 2015. After its stock price nearly doubled from $16 to $27 on the first day of trading, the trend began to move in the other direction with prices eventually falling below $10 per share. The stock has since rebounded, but Etsy is notable for being one of the worst-performing IPOs in recent history.

6. Uber

Uber’s IPO in May of 2019 was deemed a Wall Street flop after the company failed to meet its expected valuation of $120 billion upon its debut. While the ride-sharing company aimed for a $45 per share price at opening, it opened at $42 instead before closing down at $41 per share on the first day of trading.

7. SmileDirectClub

SmileDirectClub’s first day of trading in September 2019 ended up being one of the worst IPOs in decades. The stock was initially priced at $23 per share, opened at $20.55 per share, and continued to fall throughout the trading day, eventually ending down 27.5%.

8. Root

Root Inc., an auto insurance startup, looked promising enough when its IPO raised $724.4 million in 2020. Since then, the insuretech stock’s share price is down nearly 90% since its initial offering and the company’s valuation has been cut in half.

9. Casper Sleep Inc.

Casper Sleep’s 2020 IPO got off to a shaky start, with shares trading at $12 to start. The company revised its IPO price down from an initial target range of $17 to $19 per share. The IPO put the company’s valuation at around $470 million, well below the $1.1 billion valuation it had previously garnered through private fundraising.

10. Robinhood

Robinhood’s initial public offering in July of 2021 was deemed one of the worst IPOs ever for a company of its size, with shares falling as much as 10% within minutes of the opening of trading. The company ended its first day of trading at a $29 billion valuation, well short of the $35 billion valuation that had been expected.

How Many IPOs Fail?

Pinning down the IPO success rate can be difficult, as there’s a distinction between companies that flop at opening and stay down and those that eventually go on to be highly profitable. As such, investing in IPOs entails a certain amount of risk for investors because it’s so different from analyzing a stock that already has a history of being traded.

According to a Nasdaq analysis of companies that have gone public since the 1980s, the IPO success rate is about 20%. This means that 80% of companies that go public end up being unprofitable when they make their debut on a stock exchange.

The study also found that the majority of IPOs produce negative returns over the long-term. Specifically, two-thirds of new companies underperform the market within three years of their IPO date.

Those figures may seem discouraging but that doesn’t prevent companies from pursuing initial public offerings. In fact, 2021 was a record-breaking year for IPOs, with more than 2,000 companies raising $594 billion globally with public offerings. It’s impossible to know how many of those companies will succeed, but there are certain factors that can influence whether an IPO flops or not.

Why Do IPOs Fail?

IPO success — or failure — tends to be measured in terms of how well results align with expectations. There can be a significant departure from IPO valuations and the trading prices of a stock at listing.

Whether price variation is above or below the initial valuation can determine the success of an IPO. IPOs can also be evaluated based on the actual capital raised versus what the company anticipates raising by going public.

As to what causes some IPOs to fail while others succeed, planning or lack of it typically plays a part. Central to the IPO process is researching the market to determine how much interest and enthusiasm there is among investors for the company’s offering. IPO underwriters also research the company itself to determine how well-received the offering is likely to be.

If an IPO fails, it can often be chalked up to one or all of the following:

• The IPO’s valuation is wrong and the stock is priced too high to attract interest among investors

• The company is attempting to go public at the wrong time

• There’s an underlying issue with the company’s fundamentals or governance

In the case of WeWork, there were questions about the initial $47 billion valuation and whether it might be too high. There were also concerns about the company’s leadership, which contributed to the IPO being shelved.

But even companies with a promising IPO can later fail. And conversely, a seemingly failed IPO can turn into a success story later on, as evidenced by Facebook’s initial flop and eventual rise to become a trillion-dollar company in 2021.

The Takeaway

IPO investing holds the potential for rewards, but as the flops listed here show there are also serious risks involved with trading IPO stocks. If an IPO fails, it can often be chalked up to the IPO’s valuation being off the mark; an underlying problem with company fundamentals or leadership – or maybe the initial public offering occurs at a bad time, for one reason or another.

Whatever the situation, it’s important for individual investors to research upcoming IPOs to determine whether they make sense as part of an overall investing strategy.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What makes an IPO successful?

Successful IPOs are often associated with companies that have strong fundamentals and have managed to create significant interest among investors. These companies have IPO valuations that closely align with investor expectations and they’re entering the market at an optimal time.

What happens when an IPO fails?

If an IPO fails, that doesn’t necessarily signal the end of the company. The company may adjust its business model or expectations in order to find a path toward profitability. In a worst-case scenario, however, the company could end up closing down or filing bankruptcy.

Why does an IPO fail?

There are a number of reasons why an IPO may fail but it often comes down to lack of planning or unrealistic expectations on the part of the company executives or their underwriting team. An overvalued IPO, for example, or a company that has shaky financials, could end up underwhelming investors once trading opens.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Explore the IPO Series:

What Is an Initial Public Offering (IPO)?

What Is the IPO Process?

What Are IPO Proceeds?

IPO vs Acquisition: Advantages and Disadvantages

How Are IPO Prices Set?

What Is an IPO Underwriter and What Do They Do?

What Is an IPO Roadshow?

How Many Companies IPO Per Year? 2023 Trends

What Is a Quiet Period?

What Is IPO Subscription Status?

Navigating the IPO Lock-up Period

What Is IPO Due Diligence?

How to Find Upcoming IPO Stocks Before Listing Day

What Is an IPO Pop?

What to Do With Company Stock If Your Company Goes Public

IPO Book-Building Process Explained

Hot Issues (IPOs): What You Need to Know

What Is Pre-IPO Placement?

Do IPOs Offer Dividends?

Testing the Waters: What It Means in an IPO

Shorting an IPO: When Can You Do It?

Guide to the Dual-Track Process for IPOs

What Is Gross Spread?

IPO Oversubscription: Definition & Examples

A Guide to Tech IPOs

Photo credit: iStock/kate_sept2004

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SOIN0623079

Dec

2024

Home Equity Loans vs HELOCs vs Home Improvement Loans

By Janet Siroto | Family Finances, Home Ownership, personal_loan | No Comments

Maybe you’ve spent a serious amount of time watching HGTV and now have visions of turning your kitchen into a chef’s paradise. Or perhaps you have an entire Pinterest board full of super-deep soaking tubs that you’re dreaming about.

Either way, the home improvement bug has bitten you, and you’re hardly alone. In the U.S. $827 billion was spent on home improvement from 2021 to 2023, according to the U.S. Census Bureau American Housing Survey. For a bit more context, consider that the average American spent more than $9,542 on home improvement projects in 2023 — with spending up 12% over 2022. That’s a lot more than just buying a new bathroom sink.

While your home might be begging for some updates and improvements, not all of us have close to $10,000 stashed away in a savings account. For many people, realizing their home improvement goals means borrowing money. But how exactly?

Read on to learn about some of your options, including a home equity loan, a home equity line of credit (HELOC), and a home improvement loan. We’ll share the situations in which home equity loans, HELOCs, and home improvement loans work best so you can figure out which home improvement loan option is right for you.

Key Points

• Home equity loans, HELOCs, and personal home improvement loans offer different benefits for financing renovations.

• Home equity loans provide a lump sum with fixed interest rates, using home equity as collateral.

• HELOCs offer flexible access to funds up to a certain limit during a set period, with variable interest rates.

• Personal home improvement loans are unsecured, typically quicker to obtain, and may have higher interest rates.

• Choosing the right financing option depends on the borrower’s equity, the amount needed, and preferred repayment terms.

What’s the Difference Between Home Equity Loans, HELOCs, and Home Improvement Loans?

If you’ve figured out how much a home renovation will cost and now need to fund the project, the options can sound a bit confusing because they all involve the word “home.”

What’s more, you may hear the term “home equity loan” loosely applied to any funds borrowed to do home improvement work. However, there are actually different kinds of home equity loans to know about, plus one that doesn’t involve home equity at all.

So, before digging into home improvement loans vs. home improvement loans vs. HELOCs, consider the basics for each:

• A home equity loan is a lump-sum payment that a lender gives you using the equity in your home to secure the loan. These loans often have a higher limit, lower interest rate, and longer repayment term than a home improvement loan.

• A home equity line of credit, or HELOC, is a revolving line of credit that is backed by your equity in your home. It operates similarly to a credit card in that the amount you access is not set, though you will have a limit on how much you can access.

• A home improvement loan is a kind of lump-sum personal loan, and it is not backed by the equity you have in your home. It may have a higher interest rate and shorter repayment term than a home equity loan. What’s more, it may have a lower limit, making it well suited for smaller projects.

Worth noting: If you use your home as collateral to borrow funds, you could lose your property if you don’t make payments on time. That’s a significant risk to your financial security and one to take seriously.

Next, here’s a look at how key loan features line up for these options.

How Much Can I Borrow?

The sky isn’t the limit when borrowing funds. This is how much you will likely be able to access:

• For a home equity loan, you can typically borrow up to 85% of your home’s value, minus what’s owed on your mortgage. So if your home’s value is $300,000, 85% of that is $255,000. If you have a mortgage for $200,000, then $255,000 minus $200,000 leaves you with a potential loan of $55,000. You can do the math quickly with a home equity loan calculator.

• For a HELOC, you can often access up to 90% of the equity you have in your home, though some lenders may go even higher. In that case, you are likely to pay a higher interest rate. In the scenario above, with a home valued at $300,000 and a mortgage of $200,000, that means you have $100,000 equity in your home. A loan for 90% of $100,000 would be $90,000. As with other lines of credit, your credit score and employment history will likely factor into the approval decision. To figure out what payments might be on a HELOC, you can use a HELOC repayment calculator.

• For a home improvement loan, the amount you can borrow will depend on a variety of factors, including your credit score, but the typical range is between $3,000 and $50,000 or sometimes even more.

What Can the Funds Be Used for?

Interestingly, some of these funds can be used for purposes other than home improvement costs. Here’s how they stack up:

• For a home equity loan, you can certainly use the funds for an amazing new kitchen with a professional-grade range, but you can also use the money for, say, debt consolidation or college tuition.

• For a HELOC, as with a home equity loan, you can use the money as you see fit. Redoing your patio? Sure. But you can also apply the cash to open a business, pay for grad school, or knock out credit card debt.

• For a home improvement loan, there is often the requirement that you use the funds for, as the name suggests, a home improvement project, such as adding a hot tub to your property. In some cases, you may be able to use the funds for non-home purposes. Your lender can tell you more.

How Will I Receive the Funds? How Long Will It Take to Get the Money?

Consider the different ways and timing you may encounter when getting money from these loan options:

• With a home equity loan, you receive a lump sum payment of the funds borrowed. The timeline for getting your funds can be anywhere from two weeks to two months, depending on a variety of factors, including the lender’s pace.

• With a HELOC, you open a line of credit, similar to a credit card. For what is known as the draw period (typically 10 years), you can withdraw funds via a special credit card or checkbook up to your limit. It typically takes between two and six weeks to get the initial approval, but some lenders may be faster.

• With a home improvement personal loan, you receive a lump sum of cash. These tend to be the quickest way to get cash: It may only take a day or so after approval to have the funds available.

How Much Interest Will I Pay?

How much you pay to access funds for your project will vary. Take a closer look:

• For a home equity loan, you typically get a lower interest rate than some other loan types, since you are using your home equity as collateral. These are typically fixed-rate loans, so you’ll know how much you are paying every month. At the end of 2024, the average rate of a fixed, 15-year home equity loan was 8.49%.

• For a HELOC, the line of credit will typically have a rate that varies with the prime rate, though some lenders offer fixed-rate options. HELOCs may have lower interest rates than personal and home equity loans, but you will need a high credit score to snag the lowest possible rate.

• For home improvement loans, which are a kind of personal loan, rates vary widely. Currently, you might find anything from 6.99% to 36% depending on the lender and your qualifications, such as your credit score. These loans are typically fixed rate.

How Long Will I Have to Repay the Funds?

Repayment terms differ among these three options:

• For home equity loans, you will agree to a term with your lender. Terms typically range from five to 20 years, but 30 years may be available as well.

• With a HELOC, you usually have a draw period of 10 years, during which you may pay interest only. Then, you may no longer withdraw funds, and move into the principal-plus-interest repayment period, which is often 20 years.

• With a home improvement personal loan, your repayment terms are typically shorter than with the other options and will vary with the lender. You may find terms of anywhere from one to seven years or possibly longer.

Here’s how these features compare in chart form:

Feature	Home Equity Loan	HELOC	Home Improvement Personal Loan
Type of collateral	Secured via your home	Secured via your home	Unsecured
Borrowing limit	Typically up to 85% of home value, minus mortgage	Typically up to 90% or more of your home equity	Typically from $3,000 up to $50,000 or more
How funds can be used	For a variety of purposes	For a variety of purposes	Often strictly for home improvement
How funds are dispersed	Lump sum	Line of credit	Lump sum
How long to receive funds	Typically two weeks to two months	Typically two to six weeks	Often within days
Type of interest rate	Typically fixed rate and may be lower than other loans	Typically variable but some lenders offer fixed rate; rates vary	Typically fixed rate; rates vary widely
Repayment term	Typically 20 to 30 years	Typically 20 years after the 10-year draw period	Typically 1 to 7 years

Which Home Improvement Loan Option Is Better?

Now that you’ve learned about the features of these loan options, here’s some guidance on which one is likely to be best for your needs.

When Home Equity Loans Make Sense

Here are some scenarios in which a home equity loan may be a good choice:

• If you have significant home equity and are looking to borrow a large amount, a home equity loan could be the right move to access a lump sum of cash.

• If you want to have a long repayment period, the possibility of a 30-year term could be a good fit.

• When you are seeking to keep costs as low as possible, these loans may offer lower interest rates.

• A home equity loan can be a wise move when you need cash for other purposes, such as debt consolidation or educational expenses.

• Some interest payments may be tax-deductible, depending on how you use the funds, which could be a benefit of this kind of loan.

When HELOCs Make Sense

A HELOC may be your best bet in the following situations:

• You aren’t sure how much money you need and like the flexibility of a line of credit.

• You want to keep your payments as low as possible in the near future. HELOCs can usually be an interest-only loan during the first 10-year draw period of the arrangement.

• A HELOC can be a good fit for people who are doing a renovation in stages, and want to draw funds as needed versus all upfront.

• You need cash for something other than just home renovation, such as to pay down credit card debt or fund tuition.

• Depending on what you put the money toward, interest payments may be tax-deductible to a degree.

When Home Improvement Personal Loans Make Sense

Consider these upsides:

• These personal loans tend to have a straightforward, fast application process, and often have fewer fees, such as no origination fees.

• Home improvement loans are usually approved more quickly than other kinds of home loans.

• These loans can be a good way to borrow a small sum, such as $3,000 or $5,000 for a project you need to complete quickly (say, a bathroom without a functional shower).

• Home improvement loans can be a good option for new homeowners, who haven’t yet built up much equity in their home but need funds for renovation.

• For those who are uncomfortable using their home as collateral, this kind of loan can be a smart move.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

The Takeaway

Home improvement is a popular pursuit and can not only make daily life more enjoyable, it can also boost the value of what is likely your biggest asset. If you are ready to take on a renovation (or need to pay off the bills for the reno you already did), you’ll have options in terms of how to access funds.

Depending on your needs and personal situation, you might prefer a home equity loan, a home equity line of credit (HELOC), or a home improvement personal loan. Why not start by looking into a HELOC? A line of credit is a super-flexible way to borrow.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Can a HELOC only be used for repairs or renovations?

You can use the funds you draw from a home equity line of credit (HELOC) for pretty much anything you can think of. But if you are hoping to take advantage of a tax deduction for the interest you pay on your HELOC, it will need to be used to buy, build, or substantially improve a home.

Is a HELOC a second mortgage?

Yes, if you are still paying off the mortgage on your home, a home equity line of credit (HELOC) that is secured by that property would be considered a second mortgage. The same is true of a home equity loan.

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You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOHL-Q424-132

Dec

2024

Home Equity Loans and HELOCs vs Cash-Out Refi

By Becca Stanek | Family Finances, Home Ownership, mortgage | No Comments

Home equity loans, home equity lines of credit (HELOCs), and cash-out refinances are all borrowing options that allow homeowners to access the equity they’ve built in their home. By tapping into home equity — the difference between a home’s current value and the amount still owed on the mortgage — homeowners can secure funds to meet other financial goals, such as making home improvements.

While these three types of loans do have similarities, there also are key differences in how each one works. Understanding the differences in a home equity loan vs. HELOC vs. cash-out refi can help you better determine which option is right for you.

Key Points

• Homeowners can access home equity through home equity loans, HELOCs, and cash-out refinancing for various financial goals.

• HELOCs provide a revolving line of credit with adjustable interest rates and a draw period.

• Cash-out refinancing replaces an existing mortgage, offering a lump sum with potentially lower interest rates.

• Home equity loans offer a lump sum with fixed interest rates, creating a second mortgage.

• Borrowing limits differ with HELOCs generally up to 90% equity, cash-out refinancing up to 80%, and home equity loans up to 85%.

Defining Home Equity Loans, HELOCs, and Cash-Out Refi

To start, it’s important to know the basic definitions of home equity loans, HELOCs, and cash-out refinances.

Home Equity Loan

A home equity loan allows a homeowner to borrow a lump sum that they’ll then repay over a set period of time in regular installments at a fixed interest rate. Generally, lenders will allow homeowners to borrow up to 85% of their home’s equity.

This loan is in addition to the existing mortgage, making it a second mortgage. As such, a borrower usually will make payments on this loan in addition to their monthly mortgage payments. To better understand what kind of payment might be due each month, it is helpful to use a home equity loan calculator.

HELOC

A HELOC is a line of credit secured by the borrower’s home that they can access on an as-needed basis, up to the borrowing limit. The amount of the line of credit is determined by the mortgage lender and based on the amount of equity a homeowner has built, though it can be up to 90% of the equity amount. Like a home equity loan, this is a second mortgage that a borrower assumes alongside their existing home loan.

How HELOCs work is somewhat like a credit card, in that it’s a revolving loan. For example, if a borrower is approved for a $30,000 home equity line of credit, they can access it when they want, for the amount they choose (though there may be a minimum draw requirement). The borrower is only charged interest on and responsible for repaying the amount they borrowed.

Another point that borrowers should keep in mind is that there is a draw period of 5 to 10 years, during which a borrower can access funds, and a repayment period of 10 to 20 years. During the draw period, the monthly payments can be relatively low because the borrower pays interest only. During the repayment period, on the other hand, the payments can increase significantly because both principal and interest have to be paid.

Cash-Out Refinance

A cash-out refinance is a form of mortgage refinancing that allows a borrower to refinance their current mortgage for more than what they currently owe in order to receive extra funds. With a cash-out refinance, the borrower’s current mortgage is replaced by an entirely new loan.

As an example, let’s say a borrower owns a home worth $200,000 and owes $100,000 on their mortgage at a high interest rate. They could refinance at a lower interest rate, while at the same time taking out a larger mortgage. For instance, they could refinance the mortgage at $130,000. In this case, $100,000 would replace the old mortgage, and the borrower would receive the remaining amount of $30,000 in cash.

Recommended: First-time Homebuyer Guide

Turn your home equity into cash with a HELOC from SoFi.

Access up to 90% or $500k of your home’s equity to finance almost anything.

Home Equity Loans and HELOCs vs. Cash-Out Refi

Here’s a look at how a home equity loan vs. HELOC vs. cash-out refinance stack up when it comes to everything from borrowing limit to interest rate to fees:

	Home Equity Loan	HELOC	Cash-Out Refinance
Borrowing Limit	85% of borrower’s equity	Up to 90% of borrower’s equity	80% of borrower’s equity for most loans
Interest Rate	Fixed rate	Generally variable	May be fixed or variable
Type of Credit	Installment loan: Borrowers get a specific amount of money all at once that they then repay in regular installments throughout the loan’s term (generally 5 to 30 years).	Revolving credit: Borrowers receive a line of credit for a specified amount and have a draw period (5 to 10 years), followed by a repayment period (10 to 20 years).	Installment loan: Borrowers receive a lump sum payment from the excess funds of their new mortgage, which has a new rate and repayment terms (generally 15 to 30 years).
Fees	Closing costs (typically 2% to 5% of the loan amount)	Closing costs (typically 2% to 5% of the loan amount), as well as other possible costs, depending on the lender (annual fees, transaction fees, inactivity fees, early termination fees)	Closing costs (typically 3% to 5% of the loan amount)
When It Might Make Sense to Borrow	Home equity loans can make sense for borrowers who want predictable monthly payments, or who want to consolidate higher interest debt.	HELOCs can be useful for situations where a borrower may want to access funds for ongoing needs over a specified period of time, or for borrowers funding a project, such as a renovation, where the cost is not yet clear.	Cash-out refinances may be useful if borrowers need a large sum of money, such as to pay off debt or finance a large home improvement project, and can benefit from a new interest rate and/or loan term.

Borrowing Limit

With a home equity loan, lenders generally allow you to borrow up to 85% of a home’s equity. HELOCs allow borrowers to tap a similar amount, sometimes as much as 90%. Cash-out refinances, on the other hand, have a slightly lower borrowing limit — up to 80% of a borrower’s equity. The exception is a VA cash-out refi; here it is possible to borrow up to 100% per VA rules, although some lenders may impose a lower ceiling.

Interest Rate

With a home equity line of credit, the interest rate is usually adjustable. This means the interest rate can rise, and if it does, the monthly payment can increase. Home equity loans, meanwhile, generally have a fixed interest rate, meaning the interest rate remains unchanged for the life of the loan. This allows for more predictable monthly payment amounts.

A cash-out refinance can have either a fixed rate or an adjustable rate. Homeowners who opt for an adjustable rate may be able to access more equity overall.

Type of Credit

Both home equity loans and cash-out refinances are installment loans, where you receive a lump sum that you’ll then pay back in regular installments. A HELOC, on the other hand, is a revolving line of credit. This allows borrowers to take out and pay back as much as they need at any given time during the draw period.

Fees

With a home equity loan, HELOC, or cash-out refinance, borrowers may pay closing costs. HELOC closing costs may be lower compared to a home equity loan, though borrowers may incur other costs periodically as well, such as annual fees, charges for inactivity, and early termination fees.

When It Might Make Sense to Borrow

A home equity loan vs. HELOC vs. cash-out refi have varying use cases. With a fixed interest rate, home equity loans can allow for predictable payments. Their lower interest rates can make them an option for borrowers who want to consolidate higher interest debt, such as credit card debt.

HELOCs, meanwhile, provide more flexibility as borrowers can take out only as much as they need, allowing borrowers to continually access funds over a period of time. A cash-out refinance can be a good option for a borrower who wants to receive a large lump sum of money, such as to pay off debt or finance a large home improvement project.

Which Option Is Better?

Like most things in the world of finance, the answer to whether a cash-out refinance vs. HELOC vs. home equity loan is better will depend on a borrower’s financial circumstances and unique needs.

In all cases, borrowers are borrowing against the equity they’ve built in their home, which comes with risks. If a borrower is unable to make payments on their HELOC or cash-out refinance or home equity loan, the consequence could be selling the home or even losing the home to foreclosure.

Scenarios Where Home Equity Loans Are Better

A home equity loan can be the right option in certain scenarios, including when:

• You want fixed, regular second mortgage payments: A home equity loan generally will have a fixed interest rate, which can be helpful for budgeting as monthly payments will be more predictable. Some may appreciate this regularity for their second monthly mortgage payment.

• You want to get a lump sum while keeping your existing mortgage intact: Unlike a HELOC, where you draw just as much as you need at any given time, a home equity loan gives you a lump sum all at once. Plus, unlike a cash-out refinance, you aren’t replacing your existing mortgage. That way, if the terms of your current mortgage are favorable, those can remain as is.

Scenarios Where HELOCs Are Better

In the following situations, a HELOC may make sense:

• You have shorter-term or specific needs: Because HELOCs generally have a variable interest rate, they can be useful for shorter-term needs or for situations where a borrower may want access to funds over a certain period of time, such as when completing a home renovation.

• You want the option of interest-only payments: During the draw period, HELOC lenders often offer interest-only payment options. This can help keep costs lower until the repayment period, when you’ll need to make interest and principal payments. Plus, you’ll only make payments on the balance used. A HELOC interest-only repayment calculator can help borrowers understand what those monthly payments might be.

Scenarios Where Cash-Out Refi Is Better

Cash-out refinances can make sense in these scenarios:

• You need a large sum of money: If there’s a need for a large sum of money, or if the funds can be used as a tool to improve your financial situation on the whole, a cash-out refinance can make sense.

• You can get a lower mortgage rate than you currently have: If refinancing can allow you to secure a lower interest rate than your current mortgage offers, then that could be a better option than taking on a second mortgage, as you would with a home equity loan or HELOC. If interest rates have risen since you first took out your loan, however, a cash-out refi could mean paying more in interest over the life of the loan.

• You want just one monthly payment: Because a cash-out refinance replaces your existing mortgage, you won’t be adding a second monthly mortgage payment to the mix. This means you’ll have only one monthly payment to stay on top of.

• You have a lower credit score but still want to tap your home equity: In general, it’s easier to qualify for a cash-out refinance vs. HELOC or home equity loan since it’s replacing your primary mortgage.

The Takeaway

Cash-out refinancing, HELOCs, and home equity loans each have their place in a borrower’s toolbox. All three options give borrowers the ability to turn their home equity into cash, which can make it possible to achieve important goals, consolidate debt, and improve their overall financial situation.

Homeowners interested in tapping into their home equity may consider getting a HELOC or taking a cash-out refinance with SoFi. Qualifying borrowers can secure competitive rates, and Mortgage Loan Officers are available to walk borrowers through the entire process.

Learn more about SoFi’s competitive cash-out refinancing and HELOC options. Potential borrowers can find out if they prequalify in just a few minutes.

FAQ

Can you take out a HELOC and cash-out refi?

If you qualify, it is possible to get both a HELOC and cash-out refinance. Qualified borrowers can use their cash-out refinance to help repay their HELOC.

Is it easier to qualify for a HELOC or cash-out refi?

It is generally easier to qualify for a cash-out refinance. This is because the cash-out refi assumes the place of the primary mortgage, whereas a HELOC is a second mortgage.

Can you borrow more with a HELOC or cash-out refi?

Ultimately, the amount you can borrow with either a cash-out refi or HELOC will depend on how much equity you have in your home. That being said, a HELOC can offer a slightly higher borrowing limit than a cash-out refi, at up to 90% of a home’s equity as opposed to a top limit of 80% for a cash-out refinance.

Are HELOCs or cash-out refi tax deductible?

Interest on your cash-out refinance or HELOC can be tax deductible so long as you use the funds for capital home improvements. This includes projects like remodeling and renovating.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOHL-Q424-144

Dec

2024

What Is Earnings Season?

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Earnings season is the period of time when publicly-traded companies release their quarterly earnings reports, as required by the Securities and Exchange Commission (SEC). Earnings season is important for investors because it provides insight into a company’s financial health and performance.

The financial results reported during an earnings season can help investors and analysts understand a company’s prospects, how a specific industry is performing, or the state of the overall economy. Knowing when earnings season is can help investors stay up to date on this information and make better investment decisions.

When Is Earnings Season?

Earnings season, again, is a period during which public companies release quarterly earnings reports, and it occurs four times a year – generally starting within a few weeks after the close of each quarter and lasting for about six weeks. For example, the earnings season for the first quarter, which ends on March 31, would typically begin in the second week of April and wrap up at the end of May.

Earnings season normally follows this timeline:

• First quarter: Mid-April through the end of May

• Second quarter: Mid-July through the end of August

• Third quarter: Mid-October through the end of November

• Fourth quarter: Mid-January through the end of February

Note, however, that not all companies report earnings on this schedule. Companies with a fiscal year that doesn’t follow the traditional calendar year may release their earnings on a different schedule.

Many retail companies, for instance, have fiscal years that end on January 31 rather than December 31, so they can capture the results from the holiday shopping season into their annual reports. Thus, these firms may report their earnings toward the end of earnings season, or even after the typical earnings reporting period.

Investors interested in knowing when companies will report earnings can check each companies’ investor relations page, or other websites to see the earnings calendars.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Why Is Earnings Season Important for Investors?

Earnings season is an important time for investors to track a company’s or industry’s performance and better understand its financial health.

During earnings season, companies release their quarterly earnings reports, which are financial statements that lay out the revenue, expenses, and profits. This information gives investors a better understanding of how a company is operating.

Moreover, earnings season is also when companies provide guidance for the upcoming quarters, sometimes during the company’s quarterly earnings call. This guidance can give investors an idea of what to expect from a company in the future and help them make more informed investment decisions, especially if investors use fundamental analysis to choose stocks.

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The following are some additional effects of earnings season:

Volatility

You may notice fluctuations in your portfolio during earnings seasons because of stock volatility. The release of earnings reports can significantly impact a company’s stock price. If a company reports better or worse than expected earnings, for example, it may result in a spike or dip in share price.

And even if a company surpasses expectations for a given quarter, its forward-looking outlook may disappoint investors, causing them to sell and drive down its price. For this reason, earnings season is often a period of high volatility for the stock market as a whole.

Investment Opportunities

Many investors closely watch earnings reports to make investment decisions, especially traders with a short-term focus who hope to take advantage of price fluctuations before or after a company’s earnings report.

And investors with a long-term focus may pay attention to earnings season because it can give clues about a company’s future prospects. For example, if a company’s earnings are consistently increasing, it may be a suitable medium- to long-term investment. On the other hand, if a company’s earnings are decreasing quarter after quarter, it may mean that it is a stock investors want to avoid.

State of the Economy

Earnings season can help investors and analysts get a better picture of the overall economy. If most earnings reports are coming in below expectations or companies are revising their financial outlooks because they see trouble in the economy, it could be a predictor of an economic downturn or a recession.

And even if the overall economy is not at risk of a downturn, earnings season can help investors see trouble in a specific sector or industry if companies in a given industry report weaker than expected earnings.

Earnings season may give investors a holistic view of the state of the stock market and economy and help them make better investment decisions than focusing on specific stocks alone.

The Takeaway

Earnings season provides investors with valuable insights into the performance and outlook of specific companies, the stock market, and the economy as a whole. However, for most investors with a long-term focus, each earnings season shouldn’t be something that causes you too much stress.

Even if some of your holdings spike or plummet because of an earnings report during earnings season, it doesn’t mean you want to make a rash investment decision based on a single quarter’s results. You still want to keep long-term performance in mind.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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