How to Intelligently Read A Quarterly Report
The quarter is over again, and that means it’s time to do your due diligence and read the quarterly report. After all, it’s one of the easiest ways to check how your investments with a company are performing—provided for free by the company itself.
But first, you have to know what to look for.
Here are a few things that every savvy investor should look for in a company’s quarterly report—and a few essential tips for understanding quarterly report jargon.
Company Revenue and Expenses
Your first port of call is the business’s top line (revenue) and its counterpart (expenses).
Revenue is the value of all sales and goods recognized by a company for a given earning period. You may also see it called sales or income.
Expenses are the opposite of revenue. They’re a type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income.
As an investor, though, you should do more than basic subtraction. There are a few layers of analysis to be done here.
Start with the basics: comparing total revenue and expenses. Revenue should outpace expenses. From there, you can subtract expenses from revenue to see the net income, which is the accounting profit left over after a business pays its expenses. Next, you should break out the previous quarterly reports for that year and quarterly reports for the last two years. If the business is healthy and competitive, revenue for each quarter should consistently outpace the previous quarter.
Profit for the Quarter
You should also take a look at the profit for the quarter, a.k.a. the net income or bottom line earnings. If you’re smart about reading revenue and expenses, you should have already done this. Basically, profit for the quarter is the number you get when you subtract quarterly expenses from quarterly revenue. Companies that routinely report profits see their stocks in demand.
However, pay careful attention to the profit numbers over time and how the company arrives at those numbers. For example, if they arrive at good profit numbers by cutting costs (and sacrificing investments for growth), the company isn’t growing sustainably, nor is it in the right mindset for sustainable growth.
Earnings Per Share
Next, you should turn your attention to earnings per share, which is the portion of profit allocated to each outstanding share of stock. This is the most frequently cited number by financial insiders and the media when dissecting a company’s earnings report.
However, you want more than just the number. You want to check whether sales and EPS meet, exceed, or miss consensus estimates. This tells you whether the company is meeting expectations.
You should also make sure to use adjusted EPS when making these calculations. Adjusted earnings per share strips out one-time accounting items that will throw off your assessment.
Consistent Sales and Earnings Growth
In case you missed the memo, you’re looking for consistent sales and earnings growth. It directly translates to your own stock performance.
However, these numbers won’t be listed in a table for you to find, so you’ll have to crunch some numbers.
The best way to do this is to compare your stock’s data over multiple quarters going back roughly two years. You’re going to need some data analysis tools and a bit of insight from a knowledgeable advisor—otherwise, you may be thrown off by short-term gyrations. You want to assess the overall trends in the stock, not just short-term ups and downs.
The Balance Sheet
The balance sheet is a financial position document that lists a company’s assets, liabilities, and shareholder equity. Think of it as a quarterly financial checkup. You’re looking for three key factors:
- Total assets
- Total debt
Don’t just read the list, though—you’re looking for a sound balance sheet.
If you’re looking at a sound balance sheet, you’ll see a company that can consistently grow its revenue and earnings quarter after quarter. The sheet should also be free of any accounting irregularities that may spell trouble later.
Cash flow is the increase or decrease in the amount of money a business has over time. There are several types of cash flow, including:
- Net change in cash
- Cash from operating activities
- Free cash flow to equity
- Free cash flow to the firm
Any quarterly report will include a cash flow statement, which provides aggregate data on all cash inflows and outflows from all business operations. This will give you a quarterly portrait. Overall, you want a business that’s cash flow positive, meaning more money flows in than out.
Accounts receivable is an asset account representing money due to the company in the short term. You can find it on the balance sheet.
This is where you need critical thinking. A healthy company should show accounts receivable growing at the same rate as sales and inventory. If they’re mismatched, the company has problems—especially if accounts receivable outpaces sales.
Remember, it’s not just about financial results! In fact, the company’s operational performance can tell you a lot about its potential growth opportunities in the coming quarters.
You’ll see operational performance in the report segments focusing on the results of marketing campaigns or product launches from a new innovation. Keep in mind that the earnings report is designed to prove the company’s progress toward operational excellence. Make sure to read between the lines to see what the company is doing. If operations aren’t a focus, the company may not be able to sustain previous successes.
Don’t forget to look beyond the company’s earnings report. After all, a quarterly report doesn’t occur in a vacuum. It’s a report card for how well the company met quarterly expectations—and you need to check the company’s performance against those expectations.
That’s where estimates come in.
Analysts following a company will use two terms that matter to you: beat estimates or missed estimates. Every estimate set is forward-looking and includes things like revenue, sales, and earnings per share. Look for a company that consistently outperforms estimates, how well they outperform, and why they outperform.
Last but not least, take the company’s guidance on how to interpret the quarterly report. It’s not just a corporate pep talk—the company guidance represents leadership expectations for the coming quarters.
Keep in mind that these are cherry-picked to represent the company in the best light, so you have to take guidance with a grain of salt. Pay attention to how they represent information. Examine how this quarter’s guidance stacks up against the previous quarter.
Understanding Quarterly Report is Just the Start
For a smart investor, understanding quarterly report data is critical to making informed decisions. The same holds true for investments beyond the stock market—you need the right data to make informed decisions.
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