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Everything you need to know about Earnings Season

Everything you need to know about Earnings Season

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Publication Type: Investment Cases , Articles
Everything you need to know about Earnings Season

 

What is Earnings Season? Why is It Important?

Earning season is the time of the year when publicly traded companies release their quarterly or annual earnings by the end of each quarter. These reports by the companies include information about the earnings, revenue and expenses. Earnings reports give investors access to the company’s actual performance from the previous three months. There are rules regarding the deadlines by which the companies need to file and report their earnings. Companies can schedule the release on a day that benefits them.

Key Takeaways

  • Public companies must file financial reports quarterly.
  • Earnings season is when most companies file their report.
  • While earnings season is a big event for investors and analysts and may cause stock prices to be more volatile in the short term, it has little impact on long-term investment returns.

 

What do companies report in Quarterly Earnings?

The quarterly financial statements include but are not limited to:

Income Statement

The income statement of the company summarizes what the company has spent and earned during that specific period. The income statement includes:

Revenue: revenue is how much money the company earned from sales during the statement period.

Net Income: also known as the bottom line is the bottom of an income statement. It tells how much money the company has made after excluding all the expenses.

Balance Sheet

Usually, the company financial report includes a balance sheet at the end of the period (yearly). The balance sheet gives a snapshot of the financial situation and health of the company. It gives an idea of what the company a company owns, owes, owned, its reserves, and how well positioned the company is to pay off their bills. The Balance Sheet includes Total assets, Liabilities, Short-term-assets and liabilities, and Shareholder’s Equity.

Statement of Cash Flows

This explains how much money came in and out of the company over a period.  The cash flow statement guides investors to know the liquidity of the company. It also determines the company’s working capital. This helps in analyzing the financial health of the business.

Notes to the Financial Statement

Financial reports noted at the end of the financial statement, have detailed information about companies’ income, expenses, debts, key risks (it also includes lawsuits and market risks), and other details about the business.

 

Importance of Earnings Season for Investors

From an Investors point of view, earnings season is an important time to stay up to date on the financial health of major companies. These quarterly reports have a big impact on the stock price and also help guide investors with financial decisions.

 

What to look for during Earning Season

When looking at the financial earnings of the company, investors can look at the number of performance metrics like revenue to cash flow, gross margins, profit margin and other indicators. One of the key earnings metrics that shouldn't be overlooked is the earnings per share (EPS). It measures how much profit a company made per share of a stock.

Investors can look at the company’s revenues and expenses. If a company is increasing their expenses at a faster rate than their revenue, then investors could find the reason for the expenses. It could be due to poor performance, or it could be due to an increase in investment growth.

 

When do companies report their Earnings?

Public companies release their quarterly figures and reports during the end of every quarter of every fiscal year June, September, December, and March. The fiscal quarter starts in the months of January, April, July, and October. The quarter season lasts for a period of 6 weeks from the end of the previous quarter.

 

What is an Earnings Call?

Publicly traded companies often follow their year-to-date earnings report with a call. An earnings call is similar to a press conference in the sense that the information will be presented to the public.

Earnings calls are not usually mandatory, but they are conducted by almost all companies. These calls feature the CEO presenting the presentation and then providing detailed information about the quarter as well as providing guidance for the upcoming quarter. Once that ends, analysts and media members are then able to ask questions and make comments to better understand the company.

Although the public cannot participate or contribute to earnings calls, they can listen to them in real-time or through the recording. Earnings call offers first-hand information and insights to the company; they can be useful when making investment decisions.

Importance of Earnings Season

Earnings season may have an impact on growth companies. These are the companies that are still in the process of providing a business model and even a potential product. These quarterly and yearly earnings provide the progress and the performance of the company.

During the earnings season, the stakeholders and investors get access to detailed information about the company which can help them form opinions and views to make decisions based on that to invest. Companies provide future guidance and analysts offer valuation numbers for the current and at least for the next two years. Analysts offer a valuation for the companies based on the industry they cater to and various other valuation metrics and ratios. Companies' earnings reports and valuations help investors to understand what to look for in the company each quarter.

What should investors look for during the Earnings Season?

Earnings season is an important time to stay up to date on the financial health of public companies. These quarterly earnings and reports could greatly impact stock market prices, so it is important to understand what’s included in them and what they mean for investors. The stock prices are volatile and fluctuate as per the company’s performance.

The company’s prediction of what it believes an estimate will be in the future results is called guidance. Furthermore, what analysts and researchers predict the company will perform and achieve for example predicting new customers, earnings and other line items are called estimates.

What you need to know:

Even though quarter earnings are important but one earning report does not make or break a company or conclude that it is a good or bad investment. Investors who make long-term investment strategies usually focus on the long-term growth potential of the company and not the short-term news about the previous quarter or the guidance for the next quarter.

The Bottom Line

The earnings season provides insights into the financial performance and health of the majority of companies. This is important information to consider when making investment decisions. It is important to understand the report, analyze the company through the earnings report, and call about the company and its management. Earnings reports from the companies provides transparency of their perfoamance.

Furthermore, it is also important to take time and understand what is included in the earnings report, which industry the company belongs to and what it means for investors.

 

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