📊 What's Inside an Earnings Report?

In light of the 1,000+ of you who subscribed to Rate of Return in January — I wanted to spend some time briefly going over an incredibly important quarterly event that impacts all of our stock portfolios.

Rate of Return is not only a publication that continually shares updated earnings information, economic data, and global affairs — but we also take pride in covering important personal finance and investing topics along the way.

For example, here’s a post we’re incredibly proud of that covers three actions anyone can take in 2023 to be better with their money.

For those of you who are trying to stick to your 2023 financial resolutions — you’re one month down! Keep up the great work 🤠

👉 This post is especially important as folks who are trying to figure all of this investing stuff out for the first time in 2023 — starting with earnings calls.

We’ve seen a ton of well-known companies report their earnings over the last few weeks — as shared in our Week in Review posts — but what do they mean?

In this post, we’ll be covering:

• What an earnings report is

• The specific information that is shared during these events

• How to go about interpreting them for the first time

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⚡️ What is an Earnings Report?

Kicking things off with “What exactly is a quarterly earnings report?”

If you’re watching CNBC or scrolling your Public feed — you’re likely seeing financial data being shared about specific publicly-traded companies.

There’s a lot of information being thrown your way right now — so let’s work together to not only interpret it, but also think through how it might impact our portfolios.

👉 Starting from the top

Because these companies are open to the public in the sense that anyone can buy and sell their stock — they have a few responsibilities to uphold as made possible by the Securities and Exchange Commission.

One of those responsibilities is disclosing audited financial information to their investors — aka anyone who owns the stock. In efforts to do this as efficiently as possible, these publicly-traded companies release something called “quarterly earnings reports” to the public every three months.

You can fine these reports in two places:

The first is straight off the Securities and Exchange Commission’s website. There’s a way to search a company’s name and be presented a list of all of a company’s regulatory reports — including their quarterly earnings reports.

Be sure to keep an eye out for the reports labeled as “10-Qs.”

The second place to find this information is on the company’s “investor relations” website.

If you’re visiting a company’s normal customer-facing website, it might be hard to locate the information — so what I like to do is just Google the company’s name with the words “investor relations” after it. 

The investor relations website is usually the first one to pop up! Once there, you’ll be able to find the quarterly earnings reports pretty easy.

We know how to find them — but what’s inside of them?

⚡️ Information Being Shared

Starting with their financial statements — there are three financial statements you should expect to receive when a quarterly earnings report is shared.

These three financial statements are all you need as it relates to understanding the financial health of a company:

1. Balance Sheet

2. Income Statement

3. Cash Flow Statement

👉 Balance Sheet

Kicking things off with the balance sheet — this is where you’ll be able to find a company’s assets, liabilities, and owner’s equity.

Essentially, how much money the company has in the bank, the balances on their short and long-term debt, as well as the value of their assets like property, equipment, and other tangible and intangible items.

Most investors get overwhelmed by all of the information shown on this financial statement, so I’ll tell you a few things to look for in particular when you’re analyzing a company’s balance sheet.

• Net Debt — if the company had to pay back all of their debt tomorrow with cold hard cash, could they do it?

• Current Ratio — does the company have more in assets than they do in liabilities?

👉 Income Statement

Probably the most popular financial statement of the bunch — this financial statement tells you how much revenue and profit a company made during the quarter.

You’ll also be able to use this information to calculate their margins, expenses, and key financial insights needed when evaluating a business for the first time. 

Here are a few key line items I want you all looking at when reviewing and interpreting an income statement:

• Revenue — this sometimes appears as “sales” or “net sales” like it does above for Apple. This is how much the company made by selling their products and services.

A good sign to observe with this line item in particular is that it’s growing year-over-year. Usually you’ll see a company include last year’s same period financials right up next to this period’s to make it easier for you to compare and contrast their growth.

• Gross Margin — this is the gross profit the company is making by selling their product or service, after covering for their costs to produce that revenue.

This figure is usually distilled down and interpreted as a percentage. To compute the gross margin percentage yourself, just take the gross margin figure and divide it by revenue.

You want to see this figure remain around historical norms, or grow.

However, you do not want to see this number decrease — we want to be investing into companies that are making more in gross profits every year, not less!

• Net Income — this is how much in after-tax profits the company made.

Obviously, we want to see this figure increase year-over-year. More after-tax profits usually means higher earnings per share (EPS).

👉 Cash Flow Statement

Cash is king, especially as it relates to running and growing a business.

This statement tells us all about how much cash came into the business — where it came from (selling products, taking on debt, etc) — as well as how much cash left the business. 

For me, I like to keep an eye out for one line item in particular on this statement:

• Cash Flow from Operating Activities — how much money the business made by simply operating their business.

This figure is incredibly important when you’re trying to decide “Is a company’s cash flow increasing or decreasing?” Obviously, as investors, we want a company’s cash flow to be increasing.

👉 Earnings Calls

Alongside the financial statements, the CEO and other chief executives at a company will sit down and host something called an earnings call.

During this conference call, they’ll expand further upon their financial results, provide guidance as to where they think their company is headed in the near-term, as well as answer questions asked to them by analysts on Wall Street. 

Now here’s the important stuff to remember with these earnings calls:

The financial statements these companies share with us are one thing — hard numbers but more importantly only a snapshot of a specific moment in time for the company.

During this time we’re able to hear from their chief executives about non-GAAP operating metrics like:

• Remaining Performance Obligation (RPOs) for SaaS companies (ex: Snowflake)

• Backlog of purchased equipment for manufacturers (ex: Boeing)

• Best guesses on what the economy might have in store for us given their first party customer data (ex: big banks)

It’s important to tune into these earnings calls as investors not only to hear the intricacies of financial data shared — but to also have the ability to learn more about the information that is not shared in the financial statements.

⚡️ How to Interpret the Data

Now this is the fun part — actually interpreting the data and coming to your own conclusions.

Unfortunately, I can’t give you a play-by-play way to go about this — company data is open for interpretation by everyone, which means it’s personal.

However, if you’re looking to try to begin interpreting this new data for the first time, here are a few ways to go about it.

• Analyst Expectations — did they beat expectations?

Wall Street analysts’ entire lives revolve around predicting what a company’s financial statements might look like ahead of time. By building their own financial models, they’re trying to figure out if a company is overvalue / undervalued.

If a company’s revenue or after-tax profits for the quarter exceed analyst expectations, that’s usually a good thing!

• Guidance — did the company’s results align with the guidance they forecasted last quarter?

Companies usually “forecast” what their next quarter results might shape up to be ahead of time — and it’s usually pretty easy for them to do this because earnings calls take place about a month into the “next” quarter, giving the company much needed visibility.

If a company is guiding to a specific range for revenue or new customers — and they fall short of that .. not a good sign.

• Stock Price — how did the market react?

A good example of this is Meta / Facebook (META) and their recent earnings report. The market was really happy to see Mark & co. decided to authorize a $40B share buyback program as well as trim some fat around expenses.

Their stock price soared +20% the next day!

Sometimes the market overreacts — that’s apparent — but most of the time if the company’s stock price being red / green the next day has a lot to do with how good / bad their earnings were.

Boom!

You now have a “glossary” of sorts to refer back to when analyzing a company’s earnings report in the future. A company’s earnings results are our opportunity to quickly glimpse into their business and see where things are headed.

Hopefully after reading this you feel comfortable finding, reading, and interpreting this information to make educated decisions with your money.

If you’re starting your investing journey or want to change to a cleaner, social-focused investing platform, consider visiting Public.com.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.