You’ve probably come across stock market news reports that sound something like this: Stocks dip after company misses Q2 revenue expectations, or, Company sees stocks sore after beating top and bottom line estimates in latest quarter.
Such headlines are typically accompanied by some stock market movement after publicly listed companies publish their earnings report. While you might get the gist of such headlines, perhaps you would like to learn the lingo a bit better in order to get a clearer sense of what exactly is being reported. You might have also found yourself wondering what earnings season is, how often earnings reports are published, and why they affect the stock market every time they are issued.
As an investor or potential investor, you will always need to stay informed in order to be able to make wiser investment decisions. In this article, we aim to help you achieve that by answering all your questions about earnings reports and explaining some of the jargon. Here we go.
What is an earnings report?
As the name suggests, an earnings report is a report filed by a company that is publicly listed on the stock market and which describes the company’s performance. You may think of an earnings report as a particular business’s balance sheet. Active or potential shareholders are therefore interested in this data since how well a company is doing will have a ripple effect on its stock market value and earnings reports help shareholders determine whether their investment is well-placed.
Earnings reports are published quarterly and annually. Quarterly earnings reports are published every three months in a company’s fiscal year, which is why you might read about a Q1 (first quarter) earnings report or a Q2 (second quarter) report, and so on.
Following the end of the fiscal year, companies also release a corporate report which is disseminated to company shareholders and prospective investors. These annual reports compile the figures published in quarterly reports for a more global perspective. In addition to financial data, an annual report also carries information about the company’s performance and projections, as well as any relevant information pertaining to the company’s prospects.
What does an earnings report contain?
Quarterly reports contain data and figures related to a company’s earnings in terms of gross revenue, net income, operational expenses, earnings per share, and cash flow. Here’s a quick glossary of what these terms mean.
Gross revenue
Gross revenue, sales or gross income refers to the money generated by a business or company’s operations. It is normally presented at the top of an earnings report, so it is also called the top line.
Net income
Also known as net profit, net income is the money a company makes after it deducts costs and expenses from its revenue. This is what is known as the bottom line.
Operational costs
These are the expenses a company sustains in order to run its operation. These include the cost of goods sold (COGS) and SG&A operating expenses, which refer to general expenses related to selling and administration.
Earnings per share
The EPS figure is calculated by dividing a company's net profit by the number of common shares it has outstanding, so it is a marker for how much money a company makes for each share of its stock.
Cash flow
This describes the flow of money in and out of a company. Inflows refer to cash received while outflows refer to cash spent. A cash flow statement therefore reports on a company’s sourcing and spending of cash in terms of operations, investing and financing.
When are earnings reports released?
Companies must file their earnings after the end of their first three quarters, and they must also file quarterly and annual reports after their fiscal year ends. It is important to note, however, that earnings reports are released intermittently throughout the calendar year, for two reasons.
Firstly, companies publish both quarterly and annual reports. More importantly, a company’s fiscal year is not necessarily based on a calendar year. A fiscal year is a period of 12 consecutive months but it may start, and therefore end, at different stages, which is why fiscal years vary across companies. Apple Inc., for example, ends its fiscal year in late September. While fiscal years do last twelve months, they may start and end at different dates, depending on accounting and audit practices.
It’s also good to know that a fiscal year is referenced by the year in which it ends. For example, if you come across FY 2022 as you are reading about a company, this could cover a period of 12 months that might have started in 2019, depending on when the year ends.
Big public companies listed on the US stock exchange are obliged to file their earnings reports in a timely manner. Quarterly reports must be filed within 35 days following the end of the fiscal quarter and final quarter, and annual reports need to be filed no later than 60 days after the fiscal year ends.
When is earnings season?
Although companies do not release their earnings report at the same time, there is a period during which the release of a large number of earnings reports coincides. This is known as earnings season, which tends to start a week or two into the second quarter. Earnings season takes place four times a year: in early to mid-January, April, July, and October.
While many big public companies release their earnings during this time, not all companies will follow, since the timeframe is based on when a company’s fiscal quarter ends. Some companies may therefore report their earnings in between seasons.
Fun fact:
The release of Alcoa’s earnings report marks the unofficial start to the earnings season. It is one of the first big companies to publish its report. Although there is technically no end to the earnings season, in practice it lasts for around six weeks, during which time most major companies release their reports.
Why do companies report their earnings?
A company that is public is obliged to follow a set of rules and regulations prescribed by the Securities and Exchange Commission (SEC), which is a US government body that monitors capital markets to protect investors. One such SEC rule requires companies listed on the stock exchange to publish detailed reports about their earnings so that data about the company’s performance is made public. The SEC also requires companies to publish any relevant financial statements.
Such regulations are in place to ensure that important financial information about a company is transparent and available to a company’s current or potential investors, especially since such reports might indicate any performance issues a business might be struggling with.
Companies publish press releases that present the data in both an accessible and flattering form, though they obviously have to base their analysis on the real figures. Following the publication of such reports, a company’s top brass would also have to face the media and major shareholders in a question-and-answer session where they may have to defend or elaborate on their company’s performance and their interpretation of it.
Both investors and investment analysts give this data their utmost consideration, which is why the publication of an earnings report is often followed by a flurry of stock market activity.
How do earnings reports affect a company’s stock market performance?
As can be expected, a positive earnings report will boost a company’s shares on the stock exchange, and vice versa. Very often, financial analysts will have communicated their expectations for a particular company’s performance, and news covering earnings reports often refers to whether that performance has matched analysts’ estimates.
If the performance data is favourable, or has met or even exceeded analysts’ expectations, the company’s stock typically enjoys some gains as a result. On the other hand, a stock price may suffer not only if a company’s performance is worrisome, but also if it turns out to be underwhelming and misses estimates.
Where can you find earnings reports?
As a shareholder, you might want to read an earnings report more closely to analyse a company’s performance. To access such reports, there are a number of online resources that track and republish earnings data through their earnings calendar feature. Earnings reports may also be accessed through the SEC’s website and other online financial publications, and you can also directly visit a company’s website, where its earnings reports will be available.
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