Knowing how to read an earnings report gives an analyst or investor a bottom line perspective into the finances and profitability of a company.
All U.S. publicly traded companies must file a quarterly report to the Securities and Exchange Commission or SEC known as Form 10-Q. The filing must be in no later than 45 day after the end of every fiscal quarter and describes a company’s financial position.
In addition, publicly held companies must also file annual reports on Form 10-K between 60 and 90 days after their fiscal year ends.
The earnings report and press releases put out by the company have a basis on the Form 10-Q filing, which gives the bottom line in raw numbers. Nevertheless, corporations release the information in the best light possible to favorably impress stockholders and potential investors.
Information Provided on a Form 10-Q Report
The 10-Q filing is divided into two main sections which are further divided into four subsections in the first part, and six subsections in the second part. Combined, both sections give a detailed picture of a company’s financial health. The first section contains vital financial information on the company including its cash flow, balance sheet, shareholder equity etc.
The rest of the section covers how management interpreted the market, controls and procedures, and how the company performed in the quarter.
The second section covers any lawsuits the company has outstanding or has recently settled, risk factors in the market, unregistered sales of equities and how the money was used and defaults on senior securities. Items four through six contain other information and exhibits supporting the data; be aware that these filings are made on unaudited results.
Interpreting the Information
Reading the report and seeing the numbers in black and white gives you a good idea of whether the company is doing well, just getting by or in serious financial trouble. When you read an earnings report, data should be compared on a quarter to quarter and yearly basis to determine if the company’s outlook is favorable or not.
Also, a quarterly report may be positive, but the company’s guidance for future results might be a bigger influence on the company’s stock price.
The price of a company’s stock may not necessarily rise after the release of positive earnings for any number of reasons.