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June quarter results: 7 terms you will hear often
Each quarter, companies are required to report their financial performance to shareholders through regulatory filings. Most listed Indian companies do so in a particular month. This is typically called the earnings season. You will notice a lot of complicated business terms companies use while explaining the performance during the quarter.
Here are 7 key terms you should know:
This is a loosely used term that describes profits a company makes each quarter. The reference point for comparison varies for sectors. In case of companies in the IT services and telecom spaces, the net profit is compared from that in the previous quarter. So for the June 2014 quarter net profit, the comparison would be with the net profit of the March 2014 quarter. The change in the amount gives the sequential growth in profits. For manufacturing sectors, the profit growth for the year is compared to the year ago period. For June 2014, the comparison would be with the quarterly profit reported in June 2013. Companies tracked by us are expected to report 11.5% year-on-year growth (over June 2013 quarter) in the net profit..
Companies earn revenue by selling goods and services. The trend in the quarter-on-quarter revenue is important form an investors stand point. You want your company to maintain a steady growth in revenue so that profits continue to remain strong. Revenue growth is expected to remain strong in the automobile sector due to better car sales in the quarter to June 2014, according to our estimates. This is largely due to better car sales, steady raw material prices and stable rupee. Many car companies import raw material and if the rupee value falls, it hurts them..
The difference between total income and expenditure is the operating profit. Many analysts also use earnings before interest, taxation, depreciation and amortization (EBITDA) as operating profit. A rising operating profit means the company is run efficiently. A fall in the number can mean that the company is finding it difficult to generate revenue. It is an important term for manufacturing or IT services companies. The operating profit growth of consumer goods companies in the quarter to June 2014 is expected to over at 12.7%, our estimates suggest. This is because these companies have cut advertising and marketing spend and other expenses.
Very often, you may hear analysts say that there is a squeeze on profit margins. A rise in revenue does not always result in a corresponding increase in profits. For this reason, analysts look at the profit margin. The net profit as a percentage of total sales is useful. A related metric is the operating profit margin, which is the ratio of EBITDA and total sales, when reported as a percentage. So in a quarter, a company may report a better net profit, but it could also see profit margin fall. Companies in the engineering and construction space like L&T and BHEL could face a squeeze in margin in the quarter to June 2014 due to low demand and related competition, according to our analysis.
Earnings per share (EPS):
This is the company's net profit divided by the total number of its equity shares. It helps give perspective on the company's stock price. Analysts usually predict the future EPSand suggest a target price for a company as a multiple of this EPS. The Infosys shares gained ground last week due to better prospects for its future profit growth, which is reflected in EPS, and not the present performance.
Companies often guide the stock market by announcing the profit and revenue guidance. This is the management's expectation from the business. Some companies give the guidance about the performance in the near future. Infosys, one of India's biggest IT companies, gives a guidance for the profit and revenue expected for the full year along with the factors than can affect it. This helps investors and analysts forecast future profit expectations. Infosys told shareholders last week that it maintains 7-9% growth in revenue for the full year ending March 2015.
Business television channels and newspapers are full of reports based on interviews with company managements. Once they announce quarterly results, company managements conduct media interactions and disclose additional information relevant to the investor. Analysts keep track of this commentary closely. They also participate in earnings calls with company managements and ask more questions. In its earnings call last week, Infosys disclosed that it added 61 new clients in the quarter to June 2014. The total number of active clients is 910. The company is boosting the sales team by adding 300 new business management graduates.
Thirty companies that make up the S&P BSE Sensex should report an earnings growth of 18.2%, according to our estimates. This means the aggregate earnings per share or EPS of Sensex companies could grow 18.2% in the quarter to June 2014. Market pundits often say share prices are slaves of EPS. They follow growth or fall in this parameter.