Demystifying Earnings Reports

It is that time of the year when business news is dominated by the performance of various listed companies published in the form of the quarterly earnings reports. Quarterly reports state the key financial data of a company during a particular quarter. These reports are quite useful for investors because they can analyze the performance of a company and its future prospects.

For example, if a company reports poor results, investors might want to make an exit from the company causing a drop in share prices. Similarly, when the reports are above expectations, it means the company is doing well and more investors would want to buy its stocks, thus pushing prices higher.

For investors, the earnings report is an essential tool for managing their investments.

Let us understand some key components in a typical earnings report:

1. Topline:

The top line refers to a company’s gross sales or revenues. It is displayed at the top of a company’s earnings report. When a company talks about top line growth, it means there has been an increase in the company’s revenue or gross sales. Revenue or gross sales refers to the total income generated by the sale of goods and services that make up a company’s core operations. However, a topline growth does not necessarily mean an increase in profits. It also does not indicate any changes in costs of any kind incurred by the company in its operations.

Also read: What is Expense & Revenue Analysis

2. Bottomline:

The bottomline in an earnings report indicates the profit made by a company during a particular quarter. As the name suggests, this figure is indicated at the bottom of the report. The bottom line states the net profit or the net income. This is the amount that remains after all the necessary expenses and costs incurred by the company have been deducted from the topline. These expenses can include loan payments, operational charges, cost of sales, cost of goods and services and taxes. The most profitable companies show growth in both topline and bottom lines. For bottom line growth, companies can either generate top line growth or reduce their expenses. The bottom line helps investors understand how efficiently a company is managing its costs.

Also read: Income Statement & its Major Components

3. Guidance:

An important component of the quarterly earnings report, guidance is the statistical estimate of earnings expectations issued by companies to their shareholders. Guidance helps investors make decisions as it gives them an insight into the probable trends in the financial performance of a company in the future. For any business, the people running them are in the best position to know the current situation and the factors that can affect its performance in the future. This figure is based on the company’s past performance, market conditions and projections of sales and expenditures. Analysts rate a particular stock based on the company’s guidance reports. This rating helps an investor decide whether to buy, hold or sell a stock. For example, if analysts downgrade a company’s stock, investors tend to sell their securities in that company.

Also read: 3 takeaways for Indian IT stocks

4. Interest Expenses:

Interest expenses of a company are a core part of the expenses segment in the earnings report. This is a non-operating expense, meaning, these expenditures are not incurred for the company’s day-to-day operations. Generally, companies finance their growth either by debt or equity or a combination of both. Companies which have borrowings in the forms of bonds, loans or credit have to pay monthly interest as an expense on the cost of borrowing. This is referred to as interest expenses and is included under the non-operating expenses heading in an earnings report. The interest expense depends on the inflation in the economy. When inflation is high, borrowing funds becomes costlier due to spiked interest rates which increases the interest expense. Similarly, during periods of subdued inflation, borrowings carry lower interest rates reducing the expense for companies. It is also an indicator of a company’s financial health and prospects for investors and analysts. A company that has high interest expenses could be under a huge debt load which makes maintaining profitability difficult.

Also read: What can you learn by analysing a company’s debt profile?

5. Earnings Per Share:

This is a measure of a company’s profits in a given quarter. It indicates the net income earned per share of outstanding stocks. Outstanding stocks are those that are held by all its shareholders including institutional investors (large organizations such as banks, finance and insurance companies, hedge funds and mutual funds which have sizeable cash reserves and buy stocks in bulk) and the ones held by the company’s employees (restricted stocks). The earnings per share (EPS) is calculated by dividing the profits by the outstanding shares. The result is the amount of money each share of stock would receive if all the profits were distributed among the outstanding stocks. EPS shows how profitable a company is. A higher EPS indicates higher profits. If two companies belonging to the same sector have equal number of shares outstanding, then the company with the higher EPS has better profitability.

Also read: Calculation of Dividend Payout Ratio through Stock Prices

5. Look Beyond Numbers:

The earnings reports are like report cards which are made available to the public for them to know a company’s performance. The results are closely watched by investors because through the reports, they can check the progress of the companies whose shares they hold. Those who are new to investing or who lack financial expertise tend to overlook a few details while reading these numbers. It is equally important to analyze other parameters like prevailing market conditions, sector-wise performances, risk factors associated with a company, government regulations that might impact the company or the sector and any other development that can directly or indirectly have an affect the company’s performance. Mapping these with the data in the earnings report will help you in making investment decisions.

Also read: Company Annual Reports

One Related Number : $3,131 Million

Indian IT giant Infosys released its earnings report for the June quarter a few days ago. In the report, the company registered a 10 per cent year-on-year revenue growth to USD 3,131 million. It also raised its revenue growth guidance estimates for FY20 to 8.5-10% as opposed to the previous forecast of 7.5-9.5%. The positive guidance estimates come in the wake of Infosys having won many deals and tally of 100 million plus clients rose from 25 to 27. Following the announcement of its quarterly earnings, Infosys’s share price rose by 5.5% on the same day.

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