Investors must analyse stocks from various angles before deciding to invest in them. Some investors rely on technical tools, while others rely on fundamental tools to analyse stocks. Analysing a company’s financial reports is one of the significant tools most investors use to analyse the company’s performance and financial position. Quarterly results help in that direction, too.
Today’s article deals with what to look for in a company’s quarterly report while choosing stocks.
What do quarterly results of companies mean?
Quarterly reports are regular financial statements, but they cover a shorter period. While annual reports cover an entire financial year’s performance, from 01st April to 31st March of the following year, quarterly reports are released every quarter. Quarterly reports also represent the current and the preceding quarter’s financials, facilitating easy comparison. These reports are unaudited and contain the company’s balance sheet, income statement (P/L account) and cash flow statement.
Also read: What are financial statements and how to read them
These results are published in the last leg of each quarter. According to India’s financial year, the quarterly results calendar of companies consists of 3 months in each quarter, making it four quarters every year.
Quarter 1 (Q1) – 3 months from 01st April to 30th June
Quarter 2 (Q2) – 3 months from 01st July to 30th September
Quarter 3 (Q3) – 3 months from 01st October to 31st December
Quarter 4 (Q4) – 3 months from 01 January to 31st March
What is earning release in the share market and why is it important?
Earning release is the process of companies announcing their profitability and financials. These releases happen quarterly, half-yearly and annually.
Quarterly reports are essential in showing how companies perform and grow in the short term. On the other hand, yearly financial statements give a comprehensive view of the year. However, these annual reports do not show the company’s ups and downs throughout the year, as one quarter’s bad performance might be compensated with another quarter’s good performance.
The Securities and Exchange Board of India (SEBI) mandates all publicly listed companies to publish their results annually, half-yearly and quarterly. The objective here, is to provide transparency and sufficient information for investors to make investment decisions.
Significant factors to look for in quarterly reports
- Revenue
Increasing revenue is one of the primary indicators of a growing company. It represents the amount earned by companies through their core operations. Financial statements usually represent two kinds of revenues – Revenue from operations and other revenues.
While revenue from operations primarily involves money earned by the company’s core business, other revenue involves non-core earnings. For example, a company in the engineering business would consider rent income and the sale of scrap as other revenue.
- Expenses
These are costs that a company undertakes to generate money from its core business. Companies also have indirect costs that are not directly related to the company’s core business but impact the net profit.
An increase in revenue most often increases expenses. But, if the increase in expense is more than the proportion of revenue increase, the company’s profits may be affected.
The company’s ability to control its expenses is an indication of its efficiency.
Also read: Return on equity (ROE): What is it?
- Profits
Profit is the most consequential figure that determines a company’s performance. The company’s financial report represents profits from different perspectives like gross profit, net profit, profit before tax, profit after tax, earnings before interest, tax, depreciation and amortisation (EBITDA), and so on.
A negative profit suggests that the company is burning cash and is not performing well. A positive and growing profit usually indicates a well-performing company.
Besides the profit amount, the profit margin is an important indicator, too. While comparing companies, the firm showing a higher profit amount may seem better. But, profit margin is a better indicator as it suggests the company’s real efficiency.
- Interest expense
Interest expense indicates the amount of interest the company is paying against loans. An increasing interest expense suggests that the company’s debts are increasing. Investors need to analyse why debts are increasing and whether the company has sufficient assets to manage the debt.
- Earnings per share
EPS is the profit that each share in the company earns. It also helps investors assess how much they can earn per share if they invest in a company’s stock. Increasing EPS suggests that the company is growing.
Usually, companies with higher EPS are suggested to be better than those with lower EPS.
Other factors
Many other financial figures indicating the company’s position, such as debt-equity ratio, fixed asset turnover ratio, returns on equity, networth, capital, etc., are available in quarterly reports.
Besides the numbers, these reports also include the company’s strengths, risks and peer comparisons. All of these are relevant factors that investors must consider before investing. Now that you know the importance of the financial results of companies, watch out for the forthcoming company results to analyse how stocks are performing.
Also read: How to compare stocks? Explore the various tools available.
FAQs
Every publicly listed company is required to publish quarterly results on their websites, as per SEBI’s mandate. The reports are also available on the National Stock Exchange and Bombay Stock Exchange websites, depending on where the company is listed.
Return on equity measures the company’s profitability against its equity capital. It suggests the amount of profit that is generated by using the company’s equity capital. It is an important aspect for investors while making an investment decision, as their investment will also be part of the company’s equity.
Quarterly reports help companies and all other stakeholders analyse how the company is improving each quarter. It allows companies to assess their performances at short intervals and take corrective actions to ensure the entire financial year looks good.
Annual reports contain the same parameters as quarterly reports, but the figures represent one complete year’s performance, instead of a quarter’s. So, the same parameters can be looked for in an annual report, too. Annual reports show the current year’s figures, along with the previous year’s figures, allowing easy comparison.
The balance sheet represents the company’s assets and liabilities, unlike the income statement, which shows revenue, profits and losses. The balance sheet shows the company’s debts and the resources available to meet the debt obligations. It also shows the company’s shareholding pattern and the other sources of capital.