Most companies report their earnings on a quarterly basis. The earnings announcement is the official statement of a company’s profitability. There is usually much anticipation leading up to the earnings announcement,There are three main numbers that are announced:
1.) Earnings Per Share: This one is fairly self explanatory. You take the amount that the company earned and divide it by the outstanding shares to arrive at the Earnings Per Share (EPS) number. There are different ways to measure this depending on how the shares are calculated such as the fully diluted method, but that is beyond our discussion here. The EPS number answers the question, “How much has the company earned for each share of stock that I own?” and “What is my return on my investment per share?”. The Earnings Per Share number that is announced is for that quarter.
2.) Revenue: This is simply how much the company has earned that quarter. The revenue number can be broken down into different segments and the revenue that they produced. The revenue is compared to the estimates that were put out before the call and are often compared to the revenue numbers for companies in the same industry. Revenue is an important number as I believe growing revenue can be a better indicator of a growing company than Earnings Per Share.
3.) Guidance: This is what can really derail a stock. The company will offer guidance on what they think the next quarter and the rest of the year will be like. If a company reports excellent Earnings Per Share and Revenue but offers guidance that is below expectations, the stock is going to suffer the consequences. Guidance is a “forward looking” statement whereas the Earnings Per Share and Revenue numbers are reporting on what has already happened.
Of all three components, I would say that the guidance is the most important as the company is basically telling you what the future performance is likely to be. This is specifically important in the short term. If you are in a stock for the long term, you should be more willing to ride out short term fluctuations caused by earnings announcement calls. There was a time, not too long ago, that the most important metrics on an earnings call were the numbers of “link clicks” or “page views”.
Earnings calls can typically set off some wild volatility in a stock. See The After Hours Trading Circus for more on that.
After the numbers are reported and the guidance is given, then comes the conference call with the executives of the company, often the CFO and CEO. This is where the management has an opportunity to explain the results that were just reported and also field questions from the people on the call, typically market analysts that follow the stock and institutional investors. The tone of this call is often important as evidenced by Snap’s recent earnings call . The conference call gives an opportunity for management to directly address issues surrounding the company and it’s stock. Some are drone-like and others are entertaining. Most are informative.
DISCLOSURE: This article was written for informational purposes only. It is not intended as investment advice and should not be relied upon as such. Consult with a qualified financial advisor or tax professional to determine the proper investment plan for you and your circumstances.