Why it’s Important to Pay Attention to Earnings Reports

It’s easy to skip earnings reports when there’s so much else to pay attention to in the equities markets.  Let’s learn why you won’t want to miss out on this essential piece of the puzzle.

One More Thing to Pay Attention To?

Investing, when it’s not 100% passive, requires a certain measure of attentiveness.  Alas, as if you didn’t have enough on your plate already, I’m now going to add one more consideration to pay attention to:  quarterly corporate earnings reports.

Rather than view this as a burden, however, I would like to encourage you to consider it a worthwhile piece of information, and perhaps even a crucial metric of a company’s short-term performance.  Besides, earnings reports only happen once every three months; four times per year isn’t too much of a burden, now is it?

What is it, Anyway?

So, what are these earnings reports, and what is their purpose?  In short, earnings reports are filings made by public companies in which they report their performance over a recent period of time (typically every three months, though it could be every six months or even annually).  In an earnings report, companies declare certain pieces of information revolving around their overall financial health.

The purpose of an earnings report is to let investors and potential investors know how companies are doing financially, as well as to provide guidance on how the company’s leadership expects the company to perform in the near term.

In the United States, earnings reports are typically followed by the submission of a form 10-Q to the Securities and Exchange Commission.  Form 10-Q tends to require a more thorough and detailed assessment of a company’s financial performance than the announcements included in an earnings report.

The Nuts and Bolts of an Earnings Report

Earnings reports usually will include certain pieces of information, such as the revenue (how much income the company generated), the net income (the income minus the expenses, which would be the company’s profits), and the EPS or earnings per share (the profits divided by the number of shares of stock).

After these statistics have been publicly declared, it is not unusual for the CEO or president of the firm to provide “guidance,” which is a fancy way of saying how the company’s leadership expects it to perform in the near term.  Naturally, this “guidance” tends to be more positive than negative, but there are exceptions to this.

Who Pays Attention to All of This?

If you’re wondering who keeps tabs on all of these stats, the answer is: lots of people.  Analysts make a really big deal out of these figures, parsing them ad infinitum and doling out their opinions like there’s no tomorrow.  It’s not atypical for many analysts to publish a positive opinion on a company that recently had a positive earnings report – and vice versa for a company that had a negative earnings report.

Investors large and small will often pay close attention to earnings reports because they wish to know how healthy companies are from a financial standpoint.  Sometimes an earnings report can be the deciding factor – the deal maker or the deal breaker – for potential buyers of a particular stock.

The financial media – television, radio, news print, the Internet, et cetera – will also pay attention to earnings reports, especially when they’re for large, well-known companies.  Indeed, earnings reports on very large companies can make for compelling headlines in the media.

Why Should Investors Pay Attention?

The primary reason to pay attention to earnings reports is because a fundamental analysis of a company means knowing how financially healthy that company is.  Earnings reports can shed light on a firm’s income and expenses, which may be indications of how a company’s stock shares might perform in the near future.

Financially sound and consistently profitable companies with low expenses and debt are highly sought after by fundamentals-driven investors.  Earnings reports can provide crucial information and form a basis of one’s decision-making framework as an investor.  The information provided by earnings reports don’t need to be the entirety of our body of research, but they can certainly be a critical component of our due diligence.

Knowledge is Power

Making informed investing decisions means incorporating a great deal of available information and cherry-picking the most pertinent data.  Amid the sea of information and stats, the data provided by earnings reports can be some of the most important for investors.  Paying attention to earnings reports can arm us with the knowledge we need to consistently outperform in the equities markets.

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