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What are key points to check in a quarterly earnings report?

One can research the earnings trends to figure out a company’s growth trajectory.

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Last Updated: Jan 25, 2020, 05.14 PM IST
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Additionally, one should also look at Ebitda, EBIT, EBT, EAT, etc. Each form of profit is important, as it holds clues on the company’s financial performance.
By DK Aggrawal

Quarterly ear
DK Aggrawal
nings reports provide an insight into a company’s overall financial health, and they undoubtedly have a huge impact on stock prices. By taking a closer look at an earnings report, one can help analyse whether a stock is worth investing or not.

One can research the earnings trends to figure out a company’s growth trajectory. These numbers can be especially helpful for those investors who have already invested in a stock and are anxious to know what’s happening to a company and how its business is doing.

To boot, one should look at the business the company is into (has invested or will invest), as the parameters are different for different sectors. Before investing in a stock, one should always consider how the company is managing its market share or how ably is it running its operations. The quarterly earnings report can help here.

One should always look at the guidance given by company’s management, as this gives an indication of the management's view on the business and the sector. For example, if the management announces debt reduction efforts, it means the company has no immediate capex plan and wants to focus on paring debt instead. One can also have an idea from any increase in fixed assets and capacities, which suggests the company is in expansion mode.

While net profit figures are important, they should be seen along with other details such as sales growth and debt position. Moreover, an investor should check if the net profit growth is due to any one-time gain or a drop in expenditure. Other than net profit, the other heads one needs to look at are gross sales, net sales, expenditure, operating income and earnings per share (EPS), which can help an investor get an idea about the health of the business.

Additionally, one should also look at Ebitda, EBIT, EBT, EAT, etc. Each form of profit is important, as it holds clues on the company’s financial performance.

For instance, Ebidta is a measure of a company’s operating performance. It allows one to evaluate a company's performance without factoring in financing decisions, accounting decisions or tax impact. Ebit measures a firm’s profit, which includes all incomes and expenses (operating and non-operating) except interest expenses and income-tax expenses. EBT is the money retained by a firm before deducting the taxes. EAT is what is left after paying the taxes.

However, a single set of earnings numbers may not help one understand the business properly. It is better to compare them with the numbers from a prior period to measure the direction the company is taking. Have the earning grown or decreased from the same period a year ago? Besides, there are other factors such as business environment, plans, policies and fundamentals of the business which an investor should consider while making an investment decision.

Another equally important data point comes from the shareholding pattern announced at the end of every quarter. It includes ownership information across investor groups – FIIs, banks, mutual funds and promoters. A rise in promoter stake is considered a positive sign as it indicates the owners’ confidence in the company’s future earnings. In the quarterly earnings report, investors can have an idea if the promoters have pledged a very high proportion of their holdings, which could be a cause for alarm.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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