What to Look for in Quarterly Earnings Reports

Quarterly Earnings Reports Explained

7 min read

Do you know what to look for in quarterly earnings reports? US companies must issue an earnings report to the Securities and Exchange Commission (SEC) every quarter. These reports, the balance sheet, the income statement, and the cash flow statement, become public usually before the market opens or at the end of the day. Following the report, stock prices can react to varying degrees. Earlier this February, Meta Platforms (NASDAQ: META) released a surprising quarterly report where the company missed analyst expectations in key figures and released pessimistic guidance for upcoming quarters. This led to the single-day record for loss in market cap. Meta’s stock price immediately dropped 26%. When companies surpass their expected results, stock prices can jump by that amount or more.

Investors attempt to predict a company’s quarterly reports based on various information ahead of time. This is called fundamental analysis. It becomes useful to compare the key numbers between companies in the same industry. It allows investors to determine their financial health and potential companies flying under the radar. In today’s article, we will mention the most important figures to look for in any public company’s quarterly report.

1. Growth Metrics

Some of the key figures in a report are how much a company grew from quarter to quarter, year to year, and in the same quarter in the previous year. Some companies have stronger quarters. We can take e-commerce platforms as an example. November and December are usually very strong months for sales. Their Q4 sales should be much better than Q1 sales due to the Christmas holiday rush.

Double-digit gains aren’t uncommon when a company is in its early growth phase. However, once the company has been around for years, growth will usually stay below 10% unless there is a major technological advancement, external event, merger, or acquisition. Energy and utility companies are excellent examples. They have been around for decades and have stable growth. In 2022, prices for heating, gas, and oil went up. As a result, companies in these industries were able to grow more than usual.  

Growth isn’t the only important measure to consider. Many recent companies can see incredible growth but can remain unprofitable. So, we developed other metrics to better understand a company’s financial health. And we know what to look for in quarterly earnings reports.

2. Earnings per Share (EPS)

EPS is next on the list of what to look for in quarterly earnings reports. It is widely used to measure a company’s profitability and is among the first numbers many analysts look at. We obtain the EPS by dividing (net profit – preferred dividends) by the total outstanding shares. A higher EPS leads to higher profitability. A negative EPS means unprofitability. The EPS indicates how much money a company makes per outstanding share. Diluted EPS adds the shares that can be converted to outstanding shares. 

We can compare retail stores to see which is more profitable: Walmart (NYSE: WMT), Costco (NASDAQ: COST), and Target (NYSE TGT). Among them, Costco is the only one that exceeded analyst expectations for diluted EPS. 

Walmart: 0.74, its lowest in the last four quarters.

Costco: 3.04, its highest in the last three quarters.

Target: 2.16, its lowest in the last four quarters.

It isn’t surprising that Costco is the only stock among the three to be up (26%) in the last 12 months. 

3. Price-to-Earnings Ratio (P/E)

We continue with the P/E ratio. It is another useful metric to compare companies in the same industry. We obtain the value by dividing the market value per share by the EPS. We can also calculate the forward P/E and the trailing P/E. The former is useful when investors are looking at what the future of the company will look like.

Meanwhile, the latter is preferred by investors. The past is more objective than a future estimate. We usually take the 12-month trailing period to calculate this number. 

For the P/E ratio, the closer the number is to 0 while remaining positive, the better. A low P/E implies the stock is undervalued or doing much better than in the past. On the other hand, a high P/E is a sign of strong future growth. A negative P/E ratio is seldom used. It is technically used when a company posts a loss or has no earnings.

Let’s compare the P/E ratio for major US banks and financial institutions. In theory, they should be very similar. However, it seems Citigroup is trailing its peers.

Bank of America (NYSE: BAC): 9.21

Wells Fargo (NYSE: WFC): 9.86

TD Bank (NYSE: TD): 9.31

JP Morgan ((NYSE: JPM): 8.97

Citigroup (NYSE: C): 6.51

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4. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

EBITDA is next on the list of what to look for in quarterly earnings reports. When this value is high, it is a sign of good financial health. We can expect companies with high revenues that have been in the game for a long time to have a high EBITDA. On the other hand, companies that are still growing will have a lower value, some even a negative one. EBITDA isn’t perfect as it doesn’t paint the complete picture. Many expenses aren’t part of this value. 

Successful companies such as the following are at the top of their industry.

Microsoft (NASDAQ: MSFT): $95.769B

Apple (NASDAQ: AAPL): $130.634B 

Amazon (NASDAQ: AMZN): $55.449B

Meanwhile, companies with plenty of room to grow are still far behind. However, that doesn’t mean they are a bad investment. On the contrary, as long as the number keeps growing, it is a good sign.

Uber (NYSE: UBER): $25-75M

Lyft (NASDAQ: LYFT): $74.7M

Look Ahead with Earnings Reports

5. Look Ahead With Quarterly Earnings Reports

Last but not least, companies guide for the quarters to come. They reveal projects they are working on and new technologies. In some cases, they reveal bad news. Earlier this year, Netflix (NASDAQ: NFLX) revealed the streaming service would lose approximately 2M accounts in the upcoming summer. The markets reacted positively when the company announced on July 19th that this number would only be 950K. Despite the bad news, the stock was up 7% in after-hours trading.

The bad news isn’t always received negatively, especially when they aren’t as bad as expected. In other cases, companies claim their business will grow in the quarters to come when the opposite happens. In those cases, shareholders have the right to take legal action. Investors must look at the bigger picture and analyze every aspect of the business. Performing technical and fundamental analysis as part of our due diligence is often preferable. 

Final Thoughts: Quarterly Earnings Reports

To conclude what to look for in quarterly earnings reports, fundamental analysis requires investors to look at certain, if not all, the components of a quarterly earnings report. This includes the elements of a balance sheet, income statement, and cash flow statement. Completing a thorough analysis isn’t always easy due to the subtleties of each business. However, looking at the most important figures can save some time. It is also important to compare those figures with previous statements and companies operating in the same industry. The lucky ones will be able to find undervalued companies and, hopefully, make some money!

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