Reading an earnings report
Every three months a company shows its report card: what it sold, what it spent, and what it earned.
The company's report card
Every three months, US companies with shares on the stock market must tell everyone how the business did. That's the . Think of it as a school report card, four times a year. The reports are filed with the , the government agency that watches over the stock market.
Top to bottom
The main page is the . It shows money in and money out. Here's Sunny Slice's whole year:
- : $10 million. All the money customers paid for pizza. Also called sales, or "the top line" because it's at the top of the page.
- Food and boxes: $4 million. Flour, cheese, tomatoes and pizza boxes.
- Shops and workers: $3.5 million. Rent, electricity, ovens slowly wearing out, and pay for cooks and drivers.
- Interest: $0.5 million. Paid to the bank for a loan.
- Taxes: $0.5 million. Paid to the government.
- Profit: $1.5 million. What's left. Also called , net income, or "the bottom line," because it's the last line on the page.
All those costs are the company's .
Earnings per share
Sunny Slice has 1,000,000 shares. Divide the profit by the shares:
$1,500,000 ÷ 1,000,000 = $1.50 per share.
That's , earnings per share, and it's the number people watch most. If you own 10 shares, your slice of the profit is $15, even though most of it stays inside the company.
It's all about expectations
Before the report comes out, (people paid to study companies) guess what the numbers will be. The average guess is called "the estimate."
Here's the big secret: a stock doesn't move on good or bad. It moves on better or worse than expected.
Sunny Slice's latest quarter:
- Revenue was $2.6 million. The estimate was $2.5 million. That's a beat.
- EPS was $0.40. The estimate was $0.38. Another beat.
- But the boss said cheese prices are rising, and next quarter's profit will be lower than people hoped.
The stock fell 8% the next morning. Why, after two beats? Because of the third thing.
Guidance: what comes next
Companies often say what they expect for the next quarter or year. That's . Investors care more about the future than the past. Last quarter is already done. A weak forecast changes what the business is worth from now on.
After the report, the bosses usually hold an "earnings call," where they answer analysts' questions. A single sentence on that call can move the stock.
What traders should know
- Reports usually come out before the market opens or after it closes. So the stock can jump or drop a lot at the next open, skipping right past where it was.
- Moves of 5% or 10% in one day are not unusual on earnings day. Many traders choose not to hold a trade through a report because it's close to a coin flip.
- One quarter isn't a trend. Look at several reports in a row.
Remember
- Every quarter, companies report revenue, expenses and profit.
- Revenue is the top line. Profit, or earnings, is the bottom line.
- EPS = profit ÷ number of shares.
- Stocks move on results compared to expectations, and on guidance about the future.
Check yourself
1. What is revenue?
2. A company made $1.5 million of profit and has 1,000,000 shares. What's its EPS?
3. A company beats the estimates, but its stock falls. What's the most likely reason?
4. How often do US companies on the stock market report earnings?
Next lesson: Revenue and earnings growth
Money Tree School is education, not financial advice. Examples use made-up or historical numbers to show how things work; they are not recommendations to buy or sell anything. Markets can lose money.