One very important step in trading and investing is analyzing your prospective assets to ensure that they are profitable. For stocks, complete knowledge about the company offers a huge advantage, which is why it is not new that investors should learn how to understand earnings reports. In this article, we are going to talk about some tips that could help you analyze earnings reports easier.
What is an earnings report?
An earnings report is an official public report filed by companies that contain their profitability for a certain period of time. Earnings reports typically include information such as net sales, net income, earnings per share, etc. It is usually filed quarterly during earnings season, following the estimate of earnings issued by equity analysts.
Earnings reports act as a way to gauge the financial health of a company. A skill in understanding earnings reports is a must for investors to determine which companies are good enough for investments.
5 tips to that could help you analyze earnings reports easier
The most part of earnings reports compose of numerical data. Of course, not all people would want to stare at several pages full of numbers. Here are some great tips that could help you in order to analyze earnings reports easier:
Compare the results to historical data – Before anything else, you would need to compare the current results to the previous one. Determining which past results to compare with would depend on the kind of company you are looking at. Companies expected to have continuous growth all year round should be compared to the results of the previous quarter. Seasonal companies or those that have a certain strong month in a year, on the other hand, should be compared to the same quarter results of the previous year. Using this data, determine if the overall earnings had increased or decreased.
Compare the results to the expectations – Prior to the quarterly earnings reports, most companies would release an estimate expectation of the earnings that has been issued by analysts. Use this data to compare with the current results. Find out if the expected results were met and determine the reasons if they were not.
Check the factors that affected the results – Not all results are positive. Before making a final decision just because of numerical data, find out the factors that contributed to it. Some experience downturns on earnings reports are caused by temporary changes in the company and are expected to revert back to normal.
Look for other sources of information – Do not just focus on the information laid in front of you. If the company fell back this quarter, look for other information regarding the plans of the company. Some earnings may have fallen due to expenses on a new project that would be launching on the upcoming quarter. Disregarding that information can cause you to neglect a great opportunity in the future. It is likely that a representative from the company can give you guidance on these kinds of information.
Maintain a log of the company’s performance – To make your job simpler, keep notes on how the company is performing. You don’t need to keep a very formal log, just enough for you to understand it. That way, you can just look at your notes when you check the results for the next quarter without having to go through previous sets of earnings reports.
No matter how hard and time consuming it may seem to regularly read earnings reports, the knowledge you will gain can give you a huge advantage over those who simply trade blindly. Make use of this knowledge to help you in major decision making. Make it a habit to trade in a strategic way. Do not just listen to what others say about the market and make sure to do your own research to avoid bias and manipulated information.
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