Publicly traded companies issue quarterly earnings reports. An earnings report, as the name implies, details profits (or losses), and data such as sales volumes, revenue, profit margins, and more.
What are Quarterly Earnings Reports and How Do They Work?
Public companies must provide a variety of financial information in order to be listed on the stock market. Shareholders and potential investors can look under the hood of a company’s performance in quarterly earnings reports.
Three key financial statements are included in earnings reports: the balance sheet (with income statement), the cash flow statement (with cash flow statement), and the income statement (with income statement). They provide a comprehensive overview of sales, expenses, and earnings per share (EPS) when taken together.
The U.S. Securities and Exchange Commission (SEC), requires public companies to file three quarterly reports on what is known as a Form 10Q. Quarterly earnings reports include the financial information from the last three months and the comparable quarter of the previous year. Many companies also include data for the previous quarter.
A company must submit an annual earnings report on Form 10-K to the SEC at the end of each calendar year. This report contains detailed financial information about the company for the year, including breakdowns by quarters and comparisons with previous years.
Earnings reports are important.
Private companies don’t have to reveal financial information to the public. Public companies must provide complete information to shareholders, financial analysts, and the general public about how the business is performing each quarter.
Wall Street analysts make estimates about a company’s financial performance ahead of earnings season. Investors can compare analyst estimates and actual results when a company releases its quarterly results. These analyst expectations can be confirmed or disproved by earnings reports, which has major implications for stock performance.
Analysts might make recommendations about a company’s stock, including their future growth projections after the quarterly or annual reports, are released.
To assess the stock’s value and make informed investment decisions, investors look at both analysts’ and earnings reports. Short-term traders use earnings information to execute trades which can cause wild swings in share prices.
Earnings reports provide a more detailed view of the activities within different business units than just big-picture information. Analysts and investors can use this information to predict future growth. It’s easy to track the data over time because Forms 10-Q (sometimes written 10Q or 10K), contain financial statements in a standard format.
Earnings reports may be useful for a wider audience like average investors. This is because it can be used to compare companies in similar industries. The commentary of management, either in the report or during conference calls to discuss results, adds color to the company’s activities and broader trends such as price rises. The S&P 500 members can also monitor earnings reports to gain valuable insights into the state of the U.S. economic health.
David Rewcastle of Darien, Connecticut, is an Equity and Fixed Income Analyst with a background in Finance and Middle East Studies.