Company Earnings Reports

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Video Transcription:

Hello traders. Welcome to the stock trading course and the sixth module – Investing, stock picking. In this session, we’re going to talk about the company’s reports. And when we talk about a company’s report, we…Well, the most important report of them all is the earnings report and though we already have gone through what the earnings report is in previous modules, but we are going to look at it, the earnings report, with different eyes on this lesson and on this module overall because we are going to look at it on an investment basis, and not on a day trading or trading the news basis.

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So, this report is released by a company on a quarterly basis, and it’s the report to follow to know immediately if the company is being or was profitable on the last quarter. The performance of a company is one of the most important aspects an investor looks at when deciding to buy shares of the company or unload them if he already is invested in it. Okay. So, this means that by looking at the growth of the EPS, remember that EPS is earnings per share, you can decide whether to or not to invest in a company. Of course, if a company is looking green or this means that a company is growing or has been performing well over the last quarters, you are going to look to buy this stock for an investment. But if you already have invested in the company and you are looking at a decrease in EPS, which means that the performance of the company has been declining quarter-over-quarter, you are going to look to unload your shares to the market and get rid of your position in it.

Even though this report can be very difficult to read, we only need to focus on three of its components – earnings per share, revenue and net income. So the components of an earnings report. Let’s start by looking at an earnings per share and you already know that an earnings…or EPS is the net income minus dividends divided by the outstanding shares of the company. This is the most important part of the report because this is the number that has the more influence in the share price.

And when they say that this is the number that has the more influence in the share price, of course, I’m talking about the demand of the share or the buying pressure or selling pressure of the shares in the market. By looking at the previous quarter’s EPS, investors can know how well the company is performing. If we have steady growth in EPS, well the company is performing really well, and you can look to make an investment in it and not only that, but they can also compare it with other companies’ EPS from the same sector to see which company is outperforming. This means that if you are looking to invest in the biotechnology sector, you can look at different companies’ EPS for the quarter and compare them to the companies’ EPS from the previous quarters and see which company has been growing more steadily and decide on that basis where to put your money in, on what company to invest in. So, that’s one way to look at EPS.

The second part of this report is the revenue and the revenue is the amount of money that a company generates from the sale of its products or services and this is a very important number too because this is the amount of money that a company generates and by looking at previous quarterly numbers, investors can know if a company has a cash flow problem. This means that if the revenue is going down, less money is coming in on the…to a company by the sale of its products and services while they have the same cost as the previous quarter, so they have a cash problem. And remember that the more cash a company has, the less it has liabilities such as bank debts and the more they can aid for the operations without debt.

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The third is the net income, which is the overall profit of the company. Investors are always looking for a steady growth in a company’s profit. A net income growth can come from a growth in sales, which is a great…Which is great or a decrease in administrative and operational cost. When we say administrative and operational costs are decreased, we merely are talking about job cuts in the company which can be good if the operation has been optimized or bad if there is a decrease in the public’s demand for the company’s product or service and of course, if there is a decrease in the public’s demand for the company’s product or service, the overall net profit of the company is going to decrease. But you need to look at the reasons why the net income has grown or decreased on a quarterly basis. Reading these reports can be tricky because sometimes they can be mixed. This means that EPS numbers are good but revenue has decayed.

When choosing a company to invest in, you have to do your due diligence and research all the reasons these numbers have changed and not only look at them blindly such as the examples above. Let’s go through an example. If you’re looking at two companies to invest in and they have the same EPS this quarter, look at the revenue, net income and cash flow to determine the stronger one. You can also look at share price and go with the less expensive since the less expensive gives you the same investment for a lower risk.

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Now, I’m going to show you what an earnings report look like and I’m going to go to the Investor Relation site on Apple, and then I’m going to go to financial information. Then I’m going to look at the last quarterly report which is the one on July 21st. And well right here, you can see that you have a minute of the report then you can see that Apple today announced financial result for its fiscal 2015 third quarter ended June 27, 2015. The company posted quarterly revenue of 49.6 billion and quarterly net profit of 10.7 billion or 1.85 per diluted share.

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So, this is the minute of the report, but if we go below, you can see that you have all the information that you need to evaluate this company. Right here, you have the balance sheets and liabilities and share holders equity, etc.

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