How to Read Quarterly Earnings Reports 

Reading and understanding the quarterly earnings reports is important for investors to make informed decisions. These reports are financial statements of an organisation, released every three months to give a sneak peek into its present and future performance. They help analyse the value of the company and hence become one of the most significant references for stakeholders looking for opportunities to invest.

However, many investors seem overwhelmed with numbers, financial jargon, and acronyms. Let’s understand how to read quarterly earnings reports and what to look for to help you make wise investment decisions.

How to Read Quarterly Results of a Company?

As per SEBI (Securities and Exchange Board of India) guidelines, companies in India are required to release their financial reports quarterly. You can get them on the company’s website, stock exchange websites (NSE/BSE), and financial news portals. Here is what you should know to understand the earnings reports effectively:

• Gross Sales

Gross sales refer to the total sales of an organisation within a certain period. A consistent growth in gross sales displays the growing demand and good business health.

• Net Sales

Subtracting the company’s gross sales from its discounts, allowances, and returns is called net sales. They are key points to consider when reporting on the income statement with top-line revenues. Compared to gross sales, net sales provide a more reliable measure of business performance.

• Operating Income

Operating income indicates the income generated by a business after deducting its expenses, depreciation, and amortisation for a specific accounting period. High operating profit demonstrates good health of a business, showcasing the company’s ongoing condition and management efficiency as well.

Conversely, non-operating income is income from other sources of business, including revenue from rental income, dividends, and income from others. Persistent drops in operating income signal either shrinking market share or lower consumer demand.

Other Things to Consider

Given below are crucial things that you should consider while reading quarterly reports:

• Interest Cost

The money a company pays to creditors for borrowing funds to support its business operations is known as interest cost. An increase in interest cost typically indicates a rise in the organisation’s debt levels.

• Margins

Margins act as a safety net for an organisation. It is the difference between a product’s selling price and manufacturing cost. It is important to note that profit should not ideally come at the cost of margin. If the EBIT (Earnings Before Interest and Taxes) margin of the company decreases, it means that the company’s profitability has taken a hit.

• Net Profit

Net profit is the ultimate profit after all the working expenditures have been deducted from the gross profit. It is calculated by deducting tax and loan repayment from operating profit. That’s the reason net profit is considered the main point in a company’s quarterly earnings report. A higher net profit company showcases higher company profitability.

• EPS (Earnings per Share)

EPS is the net profit divided by the total number of outstanding shares, indicating business profitability. It is a part of an organisation’s profit allocated to every individual share of the stock. While reading quarterly reports, EPS is also considered important for investors because the better the EPS of a company, the higher its profitability. 

Taken as one of the major factors to gauge a company’s financial health, EPS helps investors to analyse the financial health of the company. A higher EPS often translates to greater potential returns for shareholders. Investors looking for a steady income source can consider the EPS ratio to understand a company’s ability to sustain or increase its dividend payouts.

Advantages of a Quarterly Report

Understanding how to read quarterly reports offers several advantages, such as:

• Quarterly reports help in understanding the context and background information of the performance metrics of an organisation for a specific quarter.
• Reading quarterly reports helps in understanding the fundamental reasons behind major variations in performance or targets.
• Quarterly reports can also help investors in getting a better understanding of management’s present outlook.

Conclusion

Learning how to read quarterly earnings reports is essential for understanding a company’s financial health. These reports offer valuable insights into both current and past performance, helping you assess how well a business is doing. As a result, you can better analyse potential trades and make more informed investment decisions.

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