All public companies that trade in the U.S. are required to file Form 10-Q or 10-K reports with the U.S. Securities and Exchange Commission. 10-Q reports come at the end of each fiscal quarter, while 10-K reports are filed at the end of the company’s fiscal year.
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Stock analysts and investors use these public quarterly reports to assess the financial health of a company and estimate its value relative to its stock price. Quarterly earnings reports are a detailed glimpse inside the operations of a company, but they can also contain an overwhelming amount of information for an inexperienced investor. Here are eight key things for investors to look for in a quarterly earnings report:
— Earnings per share.
— Sales and earnings growth.
— Guidance.
— Sound balance sheet.
— Positive cash flow trends.
— Accounts receivable.
— Press release.
— Share count.
Earnings Per Share
Earnings per share, or EPS, is one basic way to measure a company’s financial performance. EPS represents a company’s net profit divided by its total number of outstanding shares of stock. In practical terms, EPS tells investors how much of a company’s quarterly profit is attributed to each share of stock. Analysts and investors use EPS to calculate the price-to-earnings ratio, or P/E. The P/E ratio is one of the most popular classic value investing metrics that is calculated by dividing a stock’s share price by its EPS. The lower the P/E ratio, the more value a stock is considered to have.
Sales and Earnings Growth
While a company’s basic revenue and earnings numbers are important, understanding whether its business is shrinking, growing or stagnant may be even more important. The market values quarterly and annual growth, so investors should compare current reports to past ones.
Jim Eutsler, wealth advisor and partner at HCM Wealth Advisors, says investors should pay particularly close attention to organic sales growth.
“A firm can increase sales by buying another company or segment of another company, or by the favorable movement of foreign exchange rates,” Eutsler says.
“However, growing their core business organically is a better testament to the strength of the firm.”
Guidance
The stock market is considered forward-looking, meaning real-time share prices reflect expectations for the future rather than a company’s past performance. Along with their earnings reports from the previous quarter, many companies provide quantitative financial guidance for upcoming quarters that can help investors set expectations for future financial reports.
Joshua Leyenhorst, principal at BasePoint Accounting and Finance, says even non-financial qualitative guidance commentary can be very important.
“While it may not seem exciting, read the forecasts and projections that may be included, as these may help provide context to the financial information,” Leyenhorst says.
Sound Balance Sheet
A company’s balance sheet is a snapshot of a company’s assets, liabilities and shareholder equity. A company’s assets are everything the company owns, such as cash, real estate and patents. A company’s liabilities are its financial obligations, or debt. Shareholder equity represents its total assets minus its total liabilities.
Companies with too much debt can run into problems, especially if credit markets tighten or macroeconomic conditions deteriorate, and analysts use several ratios to interpret balance sheet statements.
“Look at ratios such as the current ratio (current assets over current liabilities), to determine if there are any liquidity issues,” Leyenhorst says.
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Positive Cash Flow Trends
Cash flow is a measure of all the cash that comes into and flows out of a business. Free cash flow is the cash a company generates after it has paid for its day-to-day expenses, such as rent, payroll and taxes.
Derek Miser, investment advisor and CEO at Miser Wealth Partners, says cash flow is a critical metric for investors.
“This can include cash flow from operating, investing and financing activities. A positive cash flow could indicate a healthy financial position,” Miser says.
For unprofitable growth stocks, free cash flow may be a better gauge of financial health than EPS.
Accounts Receivable
Accounts receivable represents the balance of money a business will receive for goods and services that have already been delivered to customers but not yet paid for. If a company’s accounts receivable and inventories aren’t growing at roughly the same rate as its revenue, it could be a red flag that a company is not being efficient at converting its sales into cash. It could also indicate a company’s customers are in financial trouble or the company is being too generous in extending credit or discounts to customers.
Any of those problems may be a warning sign of trouble ahead.
Press Release
Most investors aren’t accountants or professional stock analysts, so a 10-Q or 10-K filing may be difficult to interpret properly. Fortunately, most companies usually issue a press release along with their official quarterly filings that breaks down the company’s financial performance in a more concise, reader-friendly way.
Investors can typically find these earnings report press releases by visiting the investor relations section of a public company’s website. The press releases often contain bullet points of some of the most pertinent financial information from the quarter, as well as quotes from the company’s CEO or other top executives.
Share Count
A company’s outstanding shares represent the total number of shares of a company’s stock that are currently held by all its shareholders. Several factors can affect outstanding share count. If a company completes a stock split or reverse stock split, its share count will change accordingly. If it completes a secondary offering or issues shares as executive compensation, its outstanding share count will rise. If a company conducts a share buyback, its outstanding share count will drop.
Typically, investors want to avoid stocks that have rapidly rising share counts because it will dilute their ownership stakes.
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8 Things to Look For in a Quarterly Report originally appeared on usnews.com
