What You Should Know About Earnings Calls

January 14, 2020 · 7 minute read

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What You Should Know About Earnings Calls

For new investors—or even seasoned ones—understanding what’s going on with your stocks can be tricky. Where do you turn for information?

Although you can follow how your stocks’ prices change, that doesn’t necessarily tell you enough about how the company is doing. To help keep their shareholders in the loop, many companies conduct regular earnings calls. Here are some things to look out for when you join an earnings call—and ways to use that information.

What Is an Earnings Call?

An earnings call is a conference call that the public—including investors, analysts, and reporters—can join in order to hear company leaders discuss the company’s financial results. The earnings call often comes on the heels of an earnings report and covers a given reporting period, typically a fiscal quarter or fiscal year.

Companies may send out press releases announcing when they’ll be making earnings reports. NASDAQ and Yahoo Finance also keep calendars of expected upcoming earnings reports investors can check to stay current. Additionally, investors can check company websites for scheduled earnings calls.

Although companies don’t have to have earnings calls, they do have to file pertinent info with The U.S. Securities and Exchange Commission (SEC) regularly. Earnings calls provide an opportunity to discuss pertinent information, including these filings.

The Disclaimer

When the call begins, a company representative will likely share a disclaimer about some of the statements that will be made. Specifically, some statements might be what is known as “forward-looking” and discuss topics such as revenue, margins, income, expenses, and future business outlook.

At one point, the SEC did not allow companies to make forward-looking statements in the financial filings.

But in the 1970s, the SEC began advising companies to share this information, since they recognized it could help investors make informed decisions. Now the SEC requires that some forward-looking information is included in some public filings.

However, because no company can predict the future, the SEC requires that each warns investors that forward-looking statements may differ from actual results and trends.

Form 10-Q

The SEC requires that public companies disclose certain information regularly and on an ongoing basis. American companies must file Form 10-Q quarterly reports during the first three fiscal quarters of the year.

Information on this form may be discussed during the call. The form includes unaudited financial statements and provides the government and investors with a continuing report of the company’s financial position throughout the year.

Form 10-K

You may have noticed that companies don’t need to file Form 10-Q during the last fiscal quarter. Instead, they file Form 10-K, an annual report that shares audited financial statements, a look at the company’s business overall, and financial conditions over the previous fiscal year.

It should be noted that this annual report contains different information from the annual shareholders’ report.
Form 10-K is also audited, which means third-party accountants make sure all the financial statements are factual and correct.

Management Discussion and Analysis (MD&A)

Buried within Form 10-K under Item 7 is management’s discussion and analysis of financial condition and results of operations (MD&A ). The content of this section may also be brought up on an annual earnings call.

This is the company’s own perspective on its results over the past year, making it potentially useful information for investors. A company’s management can consist of its chief executive officer (CEO), chief financial officer (CFO), chief operating officer (COO), and its chief information officer (CIO)–although other executives may be included, depending on the company.

Members of this team typically examine both qualitative and quantitative measures in discussing the company’s performance.

The MD&A allows company leaders to give a more in-depth look at the company from their own eyes. They might discuss company operations and financial results, such as liquidity and capital resources. They might also discuss market trends or even unpredictable factors that could influence how the company moves forward.

Management will also likely share risks and their plans to take them on. For example, a company specializing in consumer goods might discuss how it will shift to meet new expectations of its customers.

As another example, a manufacturing company that utilizes natural resources could share its plans to manage a particular resource and what risks it faces from the commodities market. This is also the chance for company executives to discuss how business results have changed over the last period compared with previous periods.

Finally, the MD&A is where accounting judgments are discussed, including estimates and assumptions. The judgments may influence other figures in the company’s financial statements.

Questions and Answers

At the end of the call, there may be a chance for investors and analysts to ask questions about the financial results the company presents. Not everyone will get to ask a question.

Consider this portion of the call as a news conference with a moderator calling on certain participants. Management may answer these questions or they may decline or defer answering until they have the right information to make an accurate response.

Listening for Tone

Earnings calls will be peppered with a lot of hard facts and figures that provide concrete information. But there’s evidence that a lot can be learned by paying attention to the managers’ versus analysts’ tones.

Research shows that management is likely to speak in a positive, optimistic tone while analysts are likely to take on a more pessimistic tone in comparison. As a result, investors may want to take managerial comments with a grain of salt, keeping in mind the incentive to present a sunny outlook.

After all, they don’t want investors getting worried. The same study suggests that investors—especially institutional investors—take the analysts more seriously.

What to Do If You Miss a Call

If you’re busy or you miss the chance to dial in, don’t worry. Here are other ways you can get the information from a company’s earnings call.

Many companies will post audio from the call on their website, making it available to investors for a few weeks. Companies also frequently offer transcripts of the call to read at your leisure.

NASDAQ compiles a list of recent earnings conference calls with links to transcripts. When you visit the list on their website, you can enter a company’s ticker symbol, and find a list of transcripts.

Much of the information discussed in conference calls, including Forms 10-Q and 10-K, are part of the public record and searchable on the SEC’s website. To find a company’s public filings you can search The SEC’s Electronic Data Gathering, Analysis, and Retrieval system, or EDGAR .

The program’s express purpose is to help investors find and use information about domestic and foreign companies. Just type in the company name, or its Central Index Key (CIK) if you know it, to find recent filings. You don’t need to know a company’s CIK number, but if you have it, it will narrow your search to only information about that company.

How Analysts Use Information from Earnings Calls

The information presented in an earnings call can be particularly useful for investors and analysts practicing fundamental analysis. Those who use this strategy assign value to stock by looking at companies’ basic financial information.

Investors using fundamental analysis are typically particularly interested in looking at earnings, which represent how much money the company is making in addition to future projections.

Ways Average Investors Can Use Earnings Calls

Investors considering buying a stock for the first time may also want to take a close look at earnings. Earnings are the company’s bottom line and can have a direct impact on stock price.

Earnings calls give insight into earnings movement from quarter to quarter, letting investors know whether earnings are consistent, and if good earnings may be expected in the future. Investors may also look back at past earnings reports and calls to get an even longer view.

Past earnings can give investors an idea of where a stock has been and where it’s headed. Patterns may emerge. For example, a stock’s earnings may slow down under certain conditions or at certain times of the year.

Looking at how earnings grow can give a sense of the momentum of stock and whether it might be likely to grow in the future. Investors can take a look at these numbers themselves to see how they line up with what’s being said in the earnings call. Slow earnings may be a red flag, but they may also be part of a stock’s natural pattern.

The Price-to-Earnings Ratio

Investors who are trying to pinpoint the right time to buy a stock may also want to pay attention to another piece of information that can come out of earnings calls: the stock’s price-to-earnings ratio, or P/E.

This ratio measures value by comparing the stock price with earnings per share. When P/E is low, the stock may be undervalued, and when P/E is high, the stock is considered to be more expensive.

Investors interested in buying a stock for the first time may want to check out an earnings call as part of their due diligence. The current financial information and outlook may give investors insight into whether the stock is right for their portfolio.

Before making any moves based on an earnings call, investors are wise to consider what their overall goals are. Investors may want to avoid the temptation to time the market based on the information they learn on a given earnings call.

When an investor tries to time the market, that means they are buying and selling stocks based on how they think prices will rise and fall.

But these fluctuations are extremely difficult to predict. A company’s earnings and price may be down one quarter only to reverse direction the next. For example, selling while stocks are down can mean investors miss out on subsequent upswings.

Long-Term Benefits of Earnings Calls

For many investors, investing is a long game, and investments will be held for many years. Information received from earnings calls can help the average investor stay abreast of what’s going on with the companies in which they own shares.

But it may not make sense to act rashly—buying and selling stock too quickly based on that information.

A long-term investment strategy allows investors to ride out short-term volatility, and gives investors a chance to better understand a company’s long-term earnings trends.

Whether a seasoned investor or new to the game, investors wishing to buy and sell single stocks may do so in an active investment account.

With a SoFi Invest® account, you can speak with financial planners who can assist you in your investment decisions—giving you another resource beyond earnings calls.

To learn more about brokerage accounts and active investing, visit SoFi Invest.

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