WSJ: What to Look for in an Earnings Report

Charles Rotblut on what he looks for in an earnings report:

I always approach an earnings report with a plan: What information do I need and where can I find it? This plan is absolutely necessary because while some companies are very straightforward and formulaic with their earnings reports, others will do everything in their power to spin the story in the way they see fit. A set strategy can quickly blow through any smoke and identify the key information any investor needs to know to judge a company’s performance.

Here are the key data points I look for in an earnings release:

· Earnings per share: What was the reported number, how does it measure up against the consensus and by what percentage was it up or down?

· Revenues: What was the reported number and by what percentage was it up or down?

· Gross margins: How much did the company earn on its revenues and was this number up or down from last year? If down, why?

· Net income: What was the year-over-year change? If different than the earnings-per-share change, why?

· Cash flows: If the cash-flow statement is available, I look to see if cash from operating activities and free cash flow (cash from operating activities less capital expenditures and dividend payments) were positive. If free cash flow is negative, I’ll look to see why. If cash from operating activities is negative, I question what is wrong with the company, as this is a very negative sign. I don’t look at EBITDA (earnings before interest, taxes, depreciation and amortization) because it’s an estimation, not actual cash flow.

After reviewing this data, I read through the earnings press release and the transcript of the conference call. I am looking for metrics specific to the company (there is no substitute for understanding the company’s business model before doing this) and for forward looking guidance. I want to know what trends emerged/changed during the quarter and what management expects going forward.

It does take a bit more effort than simply looking at the headlines to see if the company met, beat or missed expectations, but it takes less effort than you think. The added insight can be valuable in determining whether or not a company is actually performing well.

Posted by on April 9th, 2015 at 7:42 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.