Is it worth the investment? Look under the hood.
© urbazon—E+/Getty Images
Earnings season. It’s the roughly three-week period in mid-to-late January, April, July, and October when most publicly traded companies release their revenue, profit, and other financial information.
Whether a company beats or misses Wall Street expectations for earnings per share (EPS), revenue, and profit margins often determines how investors react to its earnings report.
Key Points
- Quarterly earnings reports provide insight into a company’s performance and outlook.
- Earnings per share, profit margins, and revenue are key metrics for evaluating financial performance.
- Comparing reported results with analyst expectations helps explain how the market may react.
Quarterly earnings reports: Why are they important?
Corporate earnings give you a look under the hood at a company’s financial health. An earnings report can show whether revenue and profits are growing, identify potential warning signs, and reveal changes in the company’s C-suite, strategy, or outlook.
Earnings can also provide a more granular view of a company, such as regional sales, sales of a specific product, or what segment was responsible for most of the revenue.
Publicly traded companies disclose this kind of information in the quarterly (10-Q) and annual (10-K) reports they file with the Securities and Exchange Commission (SEC).
During the quarterly earnings call, company executives summarize and discuss the information that’s contained in the 10-Q and 10-K, often followed by a Q&A session with analysts. These comments give the public an overall view of how the company performed over the previous quarter and provide guidance about sales, operating costs, and other income-related items.
What is earnings per share?
EPS measures how much of a company’s profit is attributable to each outstanding share of common stock. It’s calculated by dividing net income by the number of shares outstanding.
Because it standardizes profit on a per-share basis, EPS is one of the most closely watched numbers during earnings season. Investors and analysts compare a company’s EPS with analyst estimates and prior results to gauge how the business is performing.
Earnings season begins a few weeks after the end of each calendar quarter, when most publicly traded companies release their financial results. Although reporting dates vary, many companies report during these periods:
- Q1 (January–March): Mid-April through May
- Q2 (April–June): Mid-July through August
- Q3 (July–September): Mid-October through November
- Q4 (October–December): Mid-January through February
A company’s scheduled earnings release date is typically available from these sources:
- Company website. The investor relations section typically includes the company’s earnings release schedule and conference call information.
- Your brokerage app or website. A company’s quote or research page often includes its next scheduled earnings date.
- Earnings calendars. Many financial websites publish calendars of upcoming earnings announcements.
What to look for in an earnings report
Key earnings metrics
- Revenue. Total income a company generates from selling goods or services. Revenue provides an important measure of a company’s growth, although profitability depends on more than revenue alone.
- Profit margin. A measure of a company’s profitability. It’s calculated by dividing net profit by total revenue and is expressed as a percentage.
- Earnings guidance. Management’s forecast for future sales, earnings, expenses, or other financial metrics. Investors often pay as much attention to guidance as to the current quarter’s results because it offers clues about where the business may be headed.
You don’t have to read every earnings call or pore over every financial statement. Instead, focus on a few key indicators:
- Consensus. Analysts covering a company—at investment banks and research firms, for example—publish earnings and revenue estimates before each earnings release. Financial media outlets compile those forecasts into a consensus estimate, which serves as a benchmark for evaluating a company’s results.
- Whisper numbers. Unofficial earnings expectations developed by individual investors, traders, or analysts that differ from the published consensus.
- Historical results. Review previous earnings reports to see how the company’s performance and guidance have changed over time. Past results don’t predict future performance, but they can help put the latest earnings report in context.
- Earnings per share and revenue. Before an earnings release, analyst estimates for EPS and revenue provide a benchmark for evaluating a company’s results. Compare the reported figures with those estimates and with prior results to see whether the company met expectations and how its performance has changed over time.
- Company earnings guidance. Some companies provide guidance for the next quarter or year. That outlook can be just as important as the current quarter’s results.
Once earnings are reported, compare the results with analyst estimates and note how the market reacts. Look for red flags such as bloated inventory, slowing demand, or supply chain issues.
Why earnings matter to investors
Quarterly earnings reports give you a regular opportunity to review your investments. They provide valuable insight into a company’s financial performance, outlook, and the factors that may influence its share price.
A strong or weak earnings report could increase trading volume and drive the stock price up or down. Earnings can sometimes be drastically different from expectations, either higher or lower. If investor sentiment is bullish and earnings are higher than the consensus estimate, it’s likely the stock price could go higher. But if company earnings don’t meet analyst expectations, the opposite could happen. As with anything market-related, there’s no certainty.
Sometimes companies report positive earnings, yet the stock price still falls. Perhaps the results fell short of expectations, the company lowered its outlook, or management didn’t provide guidance.
Earnings season can also reveal trends that extend beyond individual companies. When many businesses report similar challenges—such as slowing demand, rising costs, or cautious guidance—it can provide insight into broader market conditions.
A company’s earnings release can help you evaluate whether its long-term outlook has changed. Investors sometimes use that information to decide whether to maintain, reduce, or increase a position.
An earnings report is a good starting point for evaluating a company. If you want to dig deeper, explore valuation metrics such as price-to-earnings ratio, price/earnings-to-growth ratio, price-to-cash-flow ratio. Together, they can help you build a more complete picture through fundamental analysis.
This article was most recently revised and updated by Jayanthi GopalakrishnanThis article was most recently revised and updated by Dan Rosenberg
