3 Tips to Navigate Earnings Season

Four times a year, Wall Street investors break out the popcorn and watch the ticker with bated breath…

That’s the anticipation that comes with earnings season.

Earnings reports are an inside look at a company’s health. 

It’s when companies report specific results, offer explanations of why they performed like they did (especially if their results weren’t so good) and offer estimates (known as “guidance”) for what to expect in the upcoming quarter.

Think of it like an annual physical but for publicly listed companies, and done four times a year.

A lot of weight is given to earnings reports by investors. But it helps to know what you’re looking at and how it reflects on the company in the spotlight. 

Here are a couple guidelines for interpreting earnings reports…

3 Things to Remember When You’re Looking at Earnings

Earnings are typically viewed as a measure of a company’s overall health and growth potential. And they are, but you have to keep a couple things in mind. 

First, companies can put out a lot of data in their earnings reports, but only a few items are really worth focusing on. So you need to understand the numbers you’re looking at. The most commonly watched numbers are referred to as “top and bottom line” growth and earnings.

“Top line” growth is also called Revenue. It’s the gross or total income the company earned over the course of the quarter.

“Bottom line” growth is a company’s net income — total income less their costs — aka the company’s profits.

Earnings, or more specifically earnings per share (EPS), refers to how much money a company earns per share of stock outstanding. EPS also factors into a company’s P/E ratio which is a measure of a company’s valuation — or how much the market is willing to pay for $1 of earnings.

When considering these numbers, they should be compared to the same quarter a year prior. (Not the preceding quarter.)

The second thing to keep in mind is that earnings reports aren’t measured in hard numbers. They’re measured in expectations. In other words, how a company performs relative to what the market is anticipating. 

Every company puts out “guidance” for its anticipated performance for the coming quarter. But in addition, analysts at major investment firms will put out their estimates as well. It’s how well (or not) the company matches up to these expectations that make the difference when it comes to earnings.

One final thing to keep in mind is that good or bad news is not necessarily measured only in dollars. 

I’ll explain that to you in your next letter.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily