Come with us down memory lane for a moment.
More specifically, school reports!
Depending on where you were educated, report time would’ve come around between 1 and 4 times a year. Usually issued at the end of the term, semester, or school year, your report card would highlight your academic performance and progress for the period.
Earnings reports for companies are essentially the equivalent of progress report cards. An earnings report provides a comprehensive assessment of the company's performance across revenue, earnings, and profit margins for a particular timeframe.
And while you may have anticipated your school report with eager excitement or tense trepidation, depending on your expected results, you can be sure that investors look forward to the release of earnings reports of companies, issued during periods called earnings seasons.
As we enter the second earnings season of the year, we explore the significance of earnings seasons and provide you with practical tips to make informed investment decisions during what can sometimes be a volatile time for the stock market.
What’s earnings season? And when is it?
Earnings season is the period when publicly traded companies release their quarterly financial results. It typically occurs about 2 weeks after the end of each fiscal quarter and lasts roughly 6 weeks. Technically speaking, a company has 45 days after the end of the fiscal period to supply their earnings report.
The above applies to most companies where fiscal quarters align with the calendar year. There are companies with different fiscal periods, though, and their earnings reports would be issued following similar timings, adjusted for their fiscal quarters. Retail is an example, where the end of the fiscal quarter is likely to be January and not December. As such, their earnings report would be released sometime after mid-February.
In the past, earnings season would unofficially kick off with the release of the earnings report from aluminium giant, Alcoa, but these days it's the larger banks and financial institutions that are first in line to report their results.
Note: It's only a requirement of publicly traded companies in the United States to present earnings reports 4 times a year, as directed by the Securities and Exchanges Commission (SEC). That said, many companies across the globe voluntarily publish earnings reports at the same time as the US, or on a biannual or even annual basis, even though they’re not obliged to do so.
What’s in an earnings report?
As we’ve mentioned, the earnings report gives an overview of business performance for the reporting period. Earnings reports consist of several documents, including income statement, balance sheet, cash flow statement, and statement of shareholder equity.
It’s helpful to familiarise yourself with the key financial metrics they contain, as they can provide valuable insights into a company's financial health. Here are a few examples of what to look for:
Gross revenue: The total amount of revenue generated during the reporting period, before any deductions.
Gross sales: The total amount of revenue derived directly from sales activity of product or service. This is good to consider as it can give an indication of whether the business’ growth (where applicable) is primarily from market demand as opposed to purely asset acquisition or sale.
Net income: Also known as net earnings, this is the total amount of revenue after costs have been deducted. This is considered the ‘bottom line’. If income exceeded costs, the company would report a net profit. Conversely, if costs exceeded income, the company would end the period with a net loss.
Earnings per share (EPS): A key metric for investors is EPS, which is the net profit divided by the number of outstanding common shares. This amount is critical in calculating the price-per-earnings (P/E) ratio, which is a popular measure of the value of the company, i.e. whether it’s considered “expensive” and overvalued, or “cheap” and undervalued. Generally, the lower the P/E ratio when compared to its past performance or against other companies, the more valuable the company is deemed to be.
Dividends: If the company is one that pays dividends, the possible dividends payout amount may be available in the statement of shareholder equity document, included within the earnings report.
Popular investor strategies for earnings season
1. Maintaining long-term perspective
During earnings season, it’s possible that stocks you hold may experience some level of volatility, but it’s important to maintain a long-term investment perspective. Seasoned investors avoid being swayed by short-term market fluctuations or making impulsive decisions based purely on quarterly results. Instead, they focus on a company’s long-term fundamentals, such as its competitive position, growth prospects, and management’s track record.
2. Taking advantage of volatility
In what may at first appear as a complete contradiction to the above, short-term market volatility may also bring attractive buying opportunities, provided the company’s fundamentals are sound. Earnings season may offer the ideal opportunity to identify undervalued stocks, while the potential for temporary price dips may offer patient investors an opportunity to buy shares at lower prices.
Bonus - Following Nemo 😛
Ok, we know strictly speaking it’s not a strategy, but it’s still a good idea! Nemo is here to uncover and share investment opportunities, and to do so we combine incredible AI functionality with the expert opinions of market analysts. Earnings season is a busy time for these analysts. They will scrutinise financial statements, listen to earnings calls, or read transcripts of these calls. They may also talk to company managers and customers to gauge sentiment on the company’s performance. From here, an analyst can make an educated decision on how they believe a company will perform in the coming period, which we feed into our unique system of nemes.
The Analyst Recommend neme showcases stocks that analysts consider to be outstanding investment opportunities with Strong Buy signals.
What Analysts Say, on the other hand, highlights stocks with different signals as recommended by analysts, such as Strong Buy, Buy, Hold, Sell, or Strong Sell.
Top tip: Enable notifications on Nemo to be alerted to opportunities the instant they become available!
Keep calm, it’s earnings season
Remember, making informed investment decisions requires patience, diligence, and a focus on long-term growth. By understanding the significance of earnings reports and maintaining a long-term perspective, you'll be well-prepared to navigate earnings season.
If you’re ready to start your investing journey, sign up for Nemo.Money today, and we’ll make sure you’ll never miss an investment opportunity.