Earnings Reports: What Are They and Why Do They Matter?October 28th, 2019 by Tanner Wrisley
All public companies report earnings once a quarter. On this earnings date, companies release important financial documents, comment on the previous performance, and give guidance on what can be expected going forward. Analysts, portfolio managers, and investors use earnings data to execute portfolio decisions on a stock. This makes earnings releases extremely important for the growth and overall success of a stock’s performance.
All elements of a company’s earnings report paint a picture for investors, however there are a handful of metrics that are most scrutinized. Equity analysts and the market in general will have certain expectations set for these metrics before they are announced. Once the actual earnings metrics are reported, investors compare them to the analysts’ estimate or the numbers expected by the market. If the company reports higher than the expectation, then it bodes well for the stock price (you may have heard the term “beat earnings”). If the company reports lower than the expectation, then the stock may decline (“missed earnings”). Here are some of the metrics to take note of:
Earnings per Share vs. Estimate
The Earnings per Share metric, or EPS, is used to show how much the company earned on a per-share basis. Earnings is the net income for the company or the amount earned after costs. This amount is then divided by the number of outstanding shares the company has. The reported EPS is then compared to the estimated EPS.
Revenue vs. Estimate
Revenue or sales is what a company earns before costs are taken out. The reported revenue is then compared to the estimated revenue. Sometimes the revenue numbers will move the needle for investors more than the EPS metric. Because cost-cutting is usually easier to accomplish than sales growth, companies will beat their EPS estimates, but miss their revenue estimates, and see their stock price slide.
Company Guidance vs. Estimate
After the financial statements are released, most companies will hold a conference call in which they will comment on their numbers over the last quarter and give a forward outlook for the coming quarter and year. Some companies will even go as specific as giving projected EPS and revenue estimates. The company’s estimates are then compared to the estimates analysts expected the companies to give. That’s right, the company’s estimates are compared to the market’s estimates of estimates!
Industry Specific Metrics vs. Estimate
Certain companies have metrics that are industry-specific and are very important as well. For example, when Netflix reports earnings, the market looks to their subscriber growth numbers. If more people subscribed to Netflix than were expected, the stock usually jumps.
One of the most important things to keep in mind is to notice all of these earnings metrics measure success based off of beating the expectation. While it is always good to have consistent year-over-year earnings growth, it is usually not enough to push the stock higher if earnings did not grow as much as anticipated. Here at Anchor Bay, we closely monitor earnings reports, company guidance, and analyst expectations when constructing portfolios. Earnings days tend to be points of volatility so we use extra caution when trading as they approach.