How to read quarterly results of a company?

By | March 1, 2010

Usually companies hedge funds to safeguard against currency fluctuation. If this is done in the right way the company makes a Forex gain but in case of wrong bets it incurs Forex loss. Forex gain or loss can also happen when companies borrow in foreign currency.

If you are shareholder and see a Forex loss due to the downward movement in share prices you could buy the company’s shares at a cheap cost. However, this should be done only when you are sure about the company’s fundamentals and only after ascertaining that these Forex losses are only temporary.

At the end of every quarter in a year Indian companies publish the operational results of their companies. While this practice has brought in the much needed transparency into the way a company is conducted and offers a peek into the results at regular intervals, it is still a mystery for an ordinary investor. So how do you interpret these results? What do these results tell you about the company? And why do companies publish their quarterly results in the first place? Let us find out.

Importance of understanding company results

As an investor of a company the quarterly results will help you analyze the current and future performance and value of the company. The quarterly results can tell you whether you can continue to hold on to the company shares or not.

Effects of quarterly results on the stock prices

The operational results of a company that is gain or loss made by the company during the quarter will impact its share prices in the stock markets which often get published on headline numbers in the income statement.

For short term investors or intraday traders the quarterly results of big companies could have direct impact on the markets. Every time a big company announces its quarterly result the markets either go red or green depending on the results. The long term investor might not be hugely worried with the quarterly results of any company as the long term objectives of the company is not likely to change every quarter.

Most commonly considered items in results

The revenues and expenses on the earning statement of a company are presented in different styles depending on the industry the company belongs to. However, there is a uniformity followed in presenting step by step the measure of profitability from which some specific expenses are deducted. The resulting figure becomes the measure of profitability in the next step. This pattern follows till the net profit or more popularly called ‘bottom line’ is arrived at.

Net revenue or sales

The first item at the top of the list in quarterly results is the earnings statement or the income statement. This is the list of items that have generated gross revenue for the company and expenses incurred by it during the quarter. This assumes significance as it is the earnings expectations that prop up the market price of the company’s shares.

Gross revenue is the revenue made by the company by selling its goods or services. From this expenses such as excise duty, the amount that cannot be recovered from some of its customers are deducted to arrive at net revenue or sales.

Operating income or profit

Then there are a few lines under the head operating expense which are expenses related to generating revenue, and depreciation expenses. When operating expenses are deducted from the net revenue you get the operating income or profit. This is the most important measure of profitability.

Net profit

The next part of the income statement is the details about loan repayment, and tax expenses which when deducted from operating profit give you the net profit. This is more popularly called the ‘bottom line’ because this is the profit that is distributed to the shareholders. Here you will also find mentions about earnings per share or EPS, which is the ratio of net profit to outstanding shares.

Crucial but overlooked items

Other income

The head ‘other income’ is equally important as current earnings in determining the company’s exact profits. As the name implies, other income is the list of income made by the company apart from the income made from its core business operations. Some items in this list include income from interest, and earnings from sale of company’s investments. However, the other income could fluctuate from time to time and hence should not be included to calculate future earnings.

Extraordinary items

True to its name this is the list of unusual expenses or earnings made by the company during the quarter. One example is the impairment charges on goodwill and intangible assets. If the fair value is less than the recorded value of the goodwill it is considered impaired and is written off. The company then shows this as expense and subsequently reduced profit.

Forex gain or loss

You will find this item only on companies having operations abroad. Usually companies hedge funds to safeguard against currency fluctuation. If this is done in the right way the company makes a Forex gain but in case of wrong bets it incurs Forex loss. Forex gain or loss can also happen when companies borrow in foreign currency.

If you are shareholder and see a Forex loss due to the downward movement in share prices you could buy the company’s shares at a cheap cost. However, this should be done only when you are sure about the company’s fundamentals and only after ascertaining that these Forex losses are only temporary.

Factors to watch out for in the results

Always compare the present quarter’s earnings of the company with earnings of corresponding quarter in the previous fiscal or year-on-year growth (YoY). However, enough care should be taken to do meaningful comparisons when you find cases of unusual growth which might be just a one-time impact due to mergers and acquisitions.

Sometimes, a company might have issued financial instruments that can be later converted into shares. If there is an increase in these shares then the ratio of net profit to outstanding shares or earnings per share (EPS) might be diluted or decreased which when high is not a good sign.

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