Remember when you were in school and you received report cards at the end of every semester to show how well you did during that designated time? You can think of an earnings report as a company's report card -- it discloses information regarding the company's financial situation.
What is an earnings report? Public companies must file quarterly and yearly earnings reports, even if they display financials they aren't too proud of.
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Depending on the number of issued shares, companies file quarterly earnings reports with the Securities and Exchange Commission, known as a Form 10-Q -- no later than 40 or 45 days after the end of each fiscal quarter. This often works out to mean they report in January, April, July and October. Public companies are also required to file annual reports on a Form 10-K between 60 and 90 days after the fiscal period. This deadline also depends on the category the filing company falls under.
What's in an earnings report? In addition to the financial statements like balance sheets, cash flow and stockholders' deficit, the first part of an earnings report contains management discussion and analysis, quantitative and qualitative disclosures about market risk, as well as controls and procedures. The second section includes legal proceedings, unregistered sales of equity securities, and how the proceeds were used, defaults upon senior securities and exhibits.
As you go through the financial statements, keep in mind that you are trying to get a clear sense of the company's performance during the previous quarter. How did it do in relation to the same time period the last year? You might want to print a copy of the SEC's "Beginners' Guide to Financial Statements" article to have on hand as a reference.
Companies usually issue a press release with their 10-Qs. You can read this if you want a general overview of the report, but keep in mind that companies can draw attention away from earnings misses. Don't rely solely on the press releases; read the earnings report yourself.
Highlights of the earnings report Note the risk the company may encounter going forward. If there are any unresolved legal proceedings, evaluate how a lawsuit could impact the company. Look at the risk factors section to see if the risks line up with the general market trend or indicate a larger problem.
Looking at a company's earnings can help you determine its profitability. The term "earnings" refers to the amount of profit, usually the after-tax net income, that a company produces during a set period. A company's revenue is the top line figure, meaning it is the gross income for the specified period. Look at the cash flow, keeping in mind that a company can post positive net income but negative cash flow.
"Your perspective on an earnings report changes with your point of view," says John Graves, managing principal for Ventura, Calif.-based Renaissance Group, an independent financial advisory firm.
Are you a trader, looking for a reason to take action? Maybe you're an investor, hoping for to stay the course. Either way, you make sense of an earnings report by viewing it in the context of why you own the stock.