An earnings report is a document that all publicly traded companies are legally required to produce each quarter to outline the financials of the company. The majority of companies divide the year up into quarters following the months of the year i.e. Q1 is January to March, but not all do.
Earnings reports are a way for companies to share their current outlook to investors and anyone who may be interested. Investors use earnings reports as part of their decision making process when deciding to invest or sell their shares.
How an earnings report works
An earnings report will include important metrics such as net income, earning per share, earnings from continuing operations and net sales. Investors can then use this information to get a clearer picture of the financial health of a company to help them determine the risk or possible return on investing in the company.
Possibly the most important metric in an earnings report for investors and analysts is the earnings per share, as this gives a clear indication of how much the company earned for its shareholders. Produced each quarter, an earnings report provides an update of all three financial statements including:
Income statement
Balance sheet
Cash flow statement
From this, investors can get an overview of sales, expenses and net income for the most recent quarter. They can also use this information to compare performance with the previous quarter or the same quarter for the previous year.
Generally published a few weeks after the earnings report, the form 10-Q is a legal document that backs up the report and must be filed with the Securities and Exchange Commission. The 10-Q provides additional information behind the quarterly earnings report.
Advantages of an earnings report
The advantages of an earnings report include:
Provides transparency
Publishing quarterly earnings reports is a great way for publicly traded companies to provide transparency to shareholders, potential investors, financial analysts and the general public.
Informs investment decisions
Earnings reports are a valuable tool for investors and financial analysts to help inform investment decisions. The earnings per share shows how much the company made for its shareholders and can be used by investors to forecast the possible return.
Can be used to compare performance
Published every quarter, earnings reports can be used to compare performance with the previous quarter, the same quarter in the previous year and further. This can help investors determine whether the company is growing and its performance is improving.
Disadvantages of an earnings report
The disadvantages of an earnings report include:
Can make stock prices fluctuate
On days when quarterly earnings reports are published, particularly for large capitalization stocks, it can cause the stock prices to fluctuate wildly. If the earnings report shows a decline in performance the stock price can drop, equally if it shows improved performance the stock price can rise.
Measures a small sales period
It can be difficult to determine a company’s performance based on just three months of information, which is why it is important to compare reports and look back at historical earnings reports to gain a clearer view.
May show lower sales
If a company’s sales are less in Q3 than they were in Q2, the quarterly earnings report may show lower sales. Which can be caused by a shift in marketing or normal for the time of year, but shareholders may deem the company is losing sales.