Earnings reports can have a big influence on short-term stock price movements. Here’s what to understand.
We take a look at how investors use Quarterly Earnings Reports.
Close your eyes
Imagine if you had to report on your money choices four times a year. Think unexpected windfalls, how much money you earned and spent, your short and long-term money goals, how much tax you paid, that kind of thing.
It would keep you accountable. There’d be nowhere to hide.
This is essentially what happens to most companies on stock exchanges. They’re required to report their financial results to their investors and the public. Then, depending on what they report, their stock prices generally rise or take a hit in the short-term.
What is an earnings report?
The finance world tends to separate each year into four quarters.
Generally, companies that list on stock exchanges are required to give public updates about how they’re doing financially during specific times of the year.
The rules vary depending on the company type and stock exchange they’re listed on.
What information goes into an earnings report?
Typically, companies submit three different documents that give a picture of their financial performance. These include:
- An income statement: This shows the revenue, expenses, losses and gains a company has had during a specific period.
- A balance sheet: This is a snapshot of a company’s assets, debts, and shareholder equity at a specific point in time.
- A cash flow statement: This tracks how much money flows into and out of a company.
How do professional investors use earnings reports?
We asked our Spaceship Voyager Investment Team about how professional investors use quarterly reports.
“Earnings reports are one of the best indicators of the health of the economy. Businesses have a legal obligation to be accurate in their disclosure. Looking at earnings results can give us an unbiased, data-based outlook on different sectors and the economy as a whole.
For instance, Walmart’s sales indicate current US consumer spending behaviour in an inflationary environment. Nike’s margins tell us about cost inflation led by higher commodity prices and supply-disruptions. Snap’s earnings tell us about user growth and engagement trends with their platform.
Besides reporting their quarterly earnings, companies also typically give guidance, which is a forecast, on the next quarter’s metrics in terms of users, revenues, margins, capital allocation and earnings outlook. That is why earnings reports are so critical. Guidance can cause fluctuations in short-term share prices as well,” said the team.
“Overall, quarterly earnings help investors use accurate and unbiased information to decide whether to buy, hold or sell a stock.
At Spaceship, our investment philosophy is to invest Where the World is Going (WWG). Earnings reports help reinforce our conviction to invest in the dominant businesses of the future.”
When do companies have to submit their reports?
In Australia, companies that are listed on the Australian Stock Exchange (ASX) are required to report financial results half yearly and annually.
Unprofitable Australian companies also have to report quarterly cash flow reports. The ASX can also request other companies to submit quarterly cash flow and activity reports.
In the US, companies are required to report quarterly and yearly.
These requirements help protect investors by giving them visibility into their investments.
What is earnings season?
Earnings season is the time of year that companies report their financial results.
Earnings seasons generally fall during January, April, July, and October, because these are the months that follow the finish of the previous quarter.
So when you hear someone on the news or from our Spaceship Voyager Investment Team talking about earnings season, this is what that means.
What is an earnings estimate?
Most people know that past performance isn’t indicative of future performance when it comes to investing - but it doesn’t stop people from making predictions.
Earnings estimates are the best guesses that people inside and outside of companies have about how a company will perform over the next quarter and year.
If a company is forecast to perform well, it can be a more enticing investment than one that is forecast to dip.
So when a company reports its earnings, it might meet, beat, or miss its expectations. The market generally responds accordingly and this can cause an impact to the short-term price of a stock.
How do companies report their earnings?
Companies make, spend, and borrow a lot of money during the course of business.
Essentially, companies get their finance teams to crunch these numbers, figure out the results, and then package it up for their investors, analysts, and the media.
How do you find quarterly reports?
Companies are required to report their reports to the relevant securities exchange, and to their shareholders.
If you’re doing your own research, you can find ASX listed companies at the ASX website and Nasdaq listed companies at the Nasdaq website. Companies usually disclose them on the Investor Relations sections of their own websites, too.
Last updated 1 February 2023.
