Earnings Reports: What Investors Need to Know

Earnings reports are the most important regular events in the stock market. Four times a year, publicly traded companies release their financial results, and these reports can send stock prices soaring or plummeting within minutes. Understanding how to read and interpret earnings reports is essential for any serious investor or trader.

What is an Earnings Report?

An earnings report, also called a quarterly report or 10-Q filing, is a financial document that public companies must file with the SEC every three months. The report details the company's financial performance, including revenue, expenses, profits, and forward-looking guidance.

Companies typically release earnings reports within 30 to 45 days after each fiscal quarter ends. The four quarters for most companies align with the calendar year, though some companies use different fiscal years.

Key Components of an Earnings Report

1. Revenue (Top Line)

Revenue, also called sales or the top line, represents the total amount of money a company earned from selling its products or services. Investors watch revenue closely because it shows whether a company is growing its business. A company can cut costs to boost profits temporarily, but sustained growth requires increasing revenue.

2. Earnings Per Share (EPS)

Earnings per share is the company's profit divided by the number of outstanding shares. This is often the most watched number in an earnings report because it directly tells investors how much profit the company generated for each share they own.

There are two types of EPS to know:

• GAAP EPS: Calculated using Generally Accepted Accounting Principles, this is the official number
• Non-GAAP or Adjusted EPS: Excludes one-time items like restructuring charges or stock compensation

3. Gross Margin and Operating Margin

Margins tell you how efficiently a company converts revenue into profit. Gross margin shows profit after subtracting the direct cost of goods sold. Operating margin shows profit after subtracting all operating expenses. Expanding margins indicate improving efficiency, while shrinking margins can signal trouble.

4. Forward Guidance

Many companies provide guidance for future quarters or the full year. This forward-looking information often moves stock prices more than the actual results because it tells investors what to expect going forward. A company can beat current expectations but see its stock fall if guidance disappoints.

Comparing Results to Expectations

Raw numbers alone do not tell you much. What matters is how the results compare to analyst expectations, called the consensus estimate. Wall Street analysts who cover a company publish their estimates for revenue and EPS before each earnings report.

The Whisper Number

Beyond the official consensus estimate, there is often an unofficial whisper number. This represents what traders actually expect, which may differ from published estimates. A company might beat the consensus but miss the whisper number, leading to a stock decline despite the official beat.

Understanding the Earnings Call

After releasing the earnings report, companies host a conference call where executives discuss results and answer analyst questions. The earnings call often provides more insight than the press release alone. Pay attention to:

• Management tone: Are executives confident or cautious about the future?
• Segment performance: Which business units are growing or struggling?
• Competitive dynamics: What are they saying about market conditions?
• Capital allocation: Plans for buybacks, dividends, or acquisitions

Timing and Stock Price Reactions

Companies can report earnings before the market opens (BMO) or after the market closes (AMC). The timing affects how the stock reacts:

• Before Market Open: The stock gaps up or down at the open based on results
• After Market Close: The stock moves in after-hours trading and then gaps at the next open

Initial reactions can be misleading. A stock might spike after hours on a beat but give back gains the next day as traders digest the details. Conversely, an initial drop might reverse if investors conclude the selloff was overdone.

Key Metrics by Sector

Different industries emphasize different metrics in their earnings reports:

• Technology: Revenue growth rate, monthly active users, average revenue per user
• Retail: Same-store sales, inventory levels, e-commerce growth
• Banks: Net interest income, loan growth, credit quality
• Healthcare: Drug pipeline updates, patient volumes, reimbursement rates
• Industrial: Order backlog, capacity utilization, pricing power

Building an Earnings Watchlist

Track earnings dates for stocks you own or are considering. Key information to monitor includes:

• Earnings date and time (before or after market)
• Consensus estimates for revenue and EPS
• Recent analyst revisions (are estimates rising or falling?)
• Historical performance (does the company usually beat or miss?)
• Implied move from options market (how big a move is expected?)

Summary

Earnings reports are essential reading for stock investors. The key components to analyze include revenue, EPS, margins, and forward guidance. What matters most is not the absolute numbers but how results compare to expectations. The earnings call often provides crucial context that moves stocks as much as the numbers themselves. By understanding how to read and interpret earnings reports, you can make better-informed trading and investment decisions.

Learn more: EPS vs Revenue and Company Guidance.