As an investor, you've likely heard the advice to 'do your own research'. In our article, ‘How do I research what to invest in?’ , we explore the basics of investment research. We discuss how to research ETFs, listed investment companies and individual stocks. We also cover how to make sense of the data and compare it to relevant benchmarks. However, there's a concept which often receives a mention in investor research discussions, and that's quarterly earnings reports.

These reports are essential for understanding a company's performance, and can help you make informed investment decisions. That's why, in this article, we'll be exploring them in-depth.

Firstly: the importance of doing your own research

Relying on others' opinions can be risky. While analysts and experts (whatever that word might mean to you) can provide useful insights, they can also be wrong. Following their advice without understanding the reasoning behind it can lead to poor investment choices. Each investor has unique goals, risk tolerance, and time horizons . What works for one person may not work for another.

Doing your own research empowers you. It gives you control over your investments and helps you understand the factors driving your decisions. By digging into the details, you gain a clearer picture of a company's health and prospects. This knowledge can help you assess whether an investment aligns with your goals.

Personal research can also help boost your confidence. When you understand why you’re investing in a company, you’re generally less likely to panic during market fluctuations. You can make decisions based on your own analysis rather than reacting to market noise.

As a general rule, informed decisions come from thorough research. And quarterly earnings reports are a potent source of information you can turn to. Learning to read and interpret these reports can enhance your understanding for more confident, educated decisions.

What are quarterly earnings reports?

Quarterly earnings reports are financial statements that provide a snapshot of the company's financial performance over the quarter.

The main purpose of these reports is to inform shareholders and potential investors about the company's financial health. They show how well or poorly the company is currently doing, and can indicate the company's plans for the future. However, it's important to note that a company's quarterly earnings reports can't predict future performance.

As the name suggests, companies typically release quarterly earnings reports four times a year. The timing varies, but many companies follow a standard schedule, releasing reports in January, April, July, and October.

Why are they important?

As you may have guessed by now, quarterly earnings reports can be a vital part of your research toolkit. They offer detailed insights into a company's operations, financial condition, and strategic direction. By analysing these reports, you can gauge whether a company is growing, maintaining stability, or facing challenges.

These reports are useful for keeping a pulse on your investments. By reading them, you can make informed decisions guided by a clear view of a company's financial status and performance trends.

Where can I find these reports?

Investors can find quarterly earnings reports on a company's official website, usually in the investor relations section. These reports are also available on financial news websites, stock market platforms, and regulatory bodies like the Australian Securities Exchange (ASX) for listed companies.

What do quarterly earnings reports cover?

Quarterly earnings reports are packed with vital information. Each section provides a different aspect of the company's financial health. Let's break down the main sections you'll encounter:

Income statement

This section shows how much money the company made and spent. It covers revenue, expenses, and profit. You'll see figures for the past quarter and often year-to-date totals. Look for trends in sales growth and profit margins, as these can give you clues about the company's performance and efficiency.

Balance sheet

Think of this as a snapshot of the company's financial health. It lists assets (what the company owns), liabilities (what it owes), and shareholder equity. This section helps you get an idea of the company's present financial stability. Keep an eye on debt levels and cash reserves; these can indicate how well-positioned the company is to weather tough times or fund growth.

Cash flow statement

This reveals how cash moves in and out of the business. It's split into operating, investing, and financing activities. Cash flow can differ from profit, so this section is important. It shows if the company is generating enough cash to cover its needs and grow.

Management discussion and analysis (MD&A)

Here, company leaders explain the numbers in their own words. They often discuss challenges, opportunities, and future plans. This section can provide valuable context and insights into the company's strategy.

Footnotes and supplementary information

Don't skip these! They often contain important details that didn't fit elsewhere. You might find information about accounting methods, legal issues, or significant events affecting the company.

Each of these sections tells part of the company's story. By examining them together, you can potentially build a more complete picture of its financial situation and prospects. Remember, it's not just about the numbers, but understanding what they mean for the company's prospects.

What should I look for in these reports?

When diving into a quarterly earnings report, certain key points deserve your attention:

Revenue growth and trends

Track how sales are changing over time by reviewing the income statement. Are they growing, shrinking, or staying flat? Look at year-on-year (YoY) growth to see how the company's revenue compares to the same quarter last year. Also look for patterns across different quarters and years. Consistent revenue growth can be a positive sign. Consider how these trends compare to the company's industry and the broader economy, while remembering that past performance doesn't indicate future returns.

Profit margins and earnings per share

Also found in the income statement, these figures will tell you if the company is becoming more or less profitable. As the name suggests, earnings per share (EPS) show how much profit is allocated to each outstanding share of stock. Rising margins and EPS can be positive signs, but it's important to understand what's driving these changes.

Debt levels and cash position

Assess the company's financial health by looking at the balance sheet. How much debt does it carry? Does it have enough cash to cover short-term needs? Figures like the current ratio and quick ratio will reveal this. Higher ratios generally indicate better liquidity.

Review the operating cash flow – a positive number indicates the company is generating enough cash to maintain and grow its operations. A strong cash position can provide flexibility, while high debt might limit options.

Management's outlook and guidance

Pay attention to what company leaders say about the future. Are they optimistic or cautious? Do they provide specific targets for the next quarter or year? Management's confidence and vision can impact investor sentiment and stock performance.

Significant changes or anomalies

Look for anything unusual in the report. This could be a sudden jump in expenses from one year to another, a large one-off gain, or a shift in business strategy. Understanding these changes can help you better interpret the company's performance.

It's often helpful to compare these figures with previous reports and industry benchmarks to gain more context. These insights can help you make more informed investment decisions, aligning your choices with your goals and risk tolerance .

How to use this information

Quarterly earnings reports are packed with data. Here's how you can put it to work:

How to interpret data	What to look for
Compare results over time	Look at how the company's performance has changed. Compare the current quarter to previous ones. Check YoY trends. This can reveal patterns in the company's growth or challenges. Review long-term trends to understand the company’s trajectory. This can help you gauge its potential for sustained growth.
Benchmark against peers	Look at how the company’s performance stacks up against its competitors. Are its profit margins better or worse? Is it growing faster or slower? This can provide insight into its market position and relative strength. Compare the company's metrics to industry averages. This helps determine if the company is performing above or below the norm.
Identify red flags and positive indicators	Watch for warning signs like declining sales or shrinking margins. On the flip side, look for positives such as improving cash flow or expanding market share.
Market expectations	Compare the company’s results with analyst forecasts. Meeting or exceeding expectations can be a positive indicator, while falling short might be a concern. Observe how the market reacts to the earnings report. Sharp movements in the stock price can provide clues about investor sentiment.

Consider how the company's performance fits with your investment goals. Does its growth rate match your expectations? Are its debt levels within your comfort zone? Use this information to assess if the company still aligns with your investment strategy. You can regularly review these reports as part of your ongoing research. They help you stay informed and adjust your strategy as needed.

Remember, quarterly reports are just one piece of the puzzle. It can be valuable to consider them alongside other sources of information about the company and its industry. And, as mentioned earlier, they don't provide a crystal ball into the company's future returns. Market conditions, competitor growth, and a range of factors beyond your control can always impact a company's future performance.

Common research pitfalls to avoid

When analysing quarterly earnings reports, be aware of these potential traps:

• Over-relying on a single quarter's results: one quarter doesn't tell the whole story. Companies can have good or bad quarters for various reasons. Look at trends over multiple quarters or years for a more accurate picture of the company's performance.
• Ignoring industry and economic context: a company's results don't exist in a vacuum. Consider what's happening in the broader industry and economy.
• Failing to consider non-financial factors: numbers are important, but they're not everything. Pay attention to things like changes in management, new product launches, shifts in the competitive landscape, and regulatory changes. These factors can affect a company's future, even if they don't show up in the current quarter’s financials.
• Overlooking seasonality: some businesses have natural ups and downs throughout the year. Retail often booms during holidays. Construction might slow in winter. Consider these patterns when interpreting results.
• Forgetting about one-off events: unusual events can skew results. A large asset sale, a legal settlement, or a major restructuring can affect the numbers. Make sure you understand if results are due to ongoing business operations or one-time events.

By being aware of these pitfalls, you can develop a more balanced view of a company's quarterly results. Thorough research involves looking beyond just the numbers in a single report.

Keep your goals in mind

Quarterly earnings reports are powerful tools for investors. They offer a wealth of information about a company's financial health and performance. By understanding what to look for and how to interpret them, you can gain valuable insights into potential investments.

As you dive into quarterly earnings reports, keep your investment goals in mind. Use the information to assess if a company aligns with your strategy. Stay curious, ask questions, and always consider the bigger picture.

Happy investing!