What Is a Quarterly Earnings Report?
A quarterly earnings report is a filing made by public companies every three months to report on their recent financial performance. Quarterly earnings reports include items such as net income, earnings per share, earnings from continuing operations, and net sales. Stock analysts and investors use quarterly earnings reports as one way to gauge the financial health of the company and its prospects for the future.
Understanding the Quarterly Earnings Report
Quarterly earnings reports provide an update of three financial statements: the income statement, the balance sheet, and the cash flow statement. That information includes an overview of sales, expenses, and net income for the most recent quarter. The report may also provide a comparison to the previous year and possibly to the previous quarter.
Quarterly earnings reports often feature a concise summary and analysis delivered by the CEO or a company representative. These reports are typically accompanied by the company’s Form 10-Q, a mandatory filing submitted to the Securities and Exchange Commission (SEC) every quarter for the first three quarters of the year. (For the final quarter, companies file a 10-K form, summarizing annual performance.) The 10-Q is a more comprehensive document compared to the quarterly earnings report, offering additional in-depth information. It is typically made available a few weeks following the release of the quarterly earnings report.
When are quarterly earnings released?
Earnings reports, which are essential financial updates, are typically released each quarter in the United States, where they are a mandatory requirement. In contrast, UK companies are only legally required to report on an annual basis. However, due to the global nature of many industries, a significant number of UK companies also choose to provide quarterly earnings updates.
The timing of these earnings seasons generally follows a predictable pattern, starting a few weeks after the close of a financial quarter and lasting for around six weeks. Here’s a general guide to when these seasons occur:
- First quarter earnings season: After the quarter ends on 31 March, it starts in mid-April and concludes in May.
- Second quarter earnings season: Post 30 June quarter-end, it begins in mid-July and finishes in August.
- Third quarter earnings season: Following the quarter’s end on 30 September, it kicks off in mid-October and ends in November.
- Fourth quarter earnings season: After the 31 December quarter-end, this season starts in mid-January and winds up in February.
It’s important to note that not all companies have financial quarters that align with these dates. Additionally, not every publicly listed company releases its reports during the designated earnings season, leading to some companies reporting outside these typical periods.
Most major companies, however, tend to announce their results within these time frames. Firms in the same industry often report around the same time, influenced by seasonal factors affecting their sector. The exact reporting dates can vary because companies have different fiscal years, leading to varied timings in their reporting.
For instance, one company might present its third-quarter results at the end of September, while another may release its annual report at the same time.
The Impact of Quarterly Earnings Reports
The announcement of quarterly earnings for a stock, particularly for widely followed large capitalization stocks , can move the overall market. An individual stock’s price can also fluctuate wildly on days when the company’s quarterly earnings report is released.
For better or worse, a company’s ability to beat earnings estimates projected by analysts or by the firm itself can be more important than its ability to grow earnings over the prior year. If it fails to meet or exceed the estimates published before the release, that may result in a sell-off of the stock.
In capital markets, it is all about market expectations since many believe expectations are already reflected in stock prices, following the efficient markets theory.
How to use earnings reports in trading strategies
Before diving into trading based on earnings reports, investors should first assess their readiness to engage in such immediate and potentially volatile activity.
Many investors opt to steer clear of the inherent fluctuations of earnings season, preferring to wait until share prices stabilize. This approach allows them time to thoroughly analyze the financial data, guidance provided in earnings transcripts, calls, presentations, and media coverage.
For those who are more patient, an initial strategy for trading on earnings reports might involve observing the trends and patterns over several reporting periods for a particular company before making any decisions to buy or sell its shares.
This cautious approach is rooted in the understanding that the information revealed in an earnings report can greatly influence market sentiment towards a company, which in turn can lead to significant changes in its stock price.
Additionally, investors should consider the potential domino effect that one company’s earnings results can have on its competitors within the same industry. Particularly strong or weak updates can impact not just the reporting company but also its peers in the sector.
For an individual trader, keeping track of every company participating in earnings season is an overwhelming task. Therefore, it’s more practical to refine your focus to a select group of key players. This group could consist of businesses in which you’re already invested, or companies you’ve been monitoring with the intention of potentially adding them to your portfolio.
Once you’ve narrowed down your list, the next step is to determine when each company is scheduled to release its earnings report. You can do this by consulting the company’s earnings calendar and making a note of the specific dates. It’s also important to be aware of the stock exchange on which the company is listed, as this can affect the timing and impact of their earnings announcement.
Do your research
Before an earnings announcement, it’s crucial to review the estimated earnings figures that analysts and the media have discussed. Keep in mind that the market’s reaction on the announcement day often focuses not just on the actual figures in the report, but also on how these figures compare to analysts’ expectations.
If a company’s reported numbers exceed expectations, this could indicate a potential rise in the share price, and conversely, if they fall short, the share price might decline. Even if key metrics like profits, customer or subscription numbers, and earnings per share show an increase, failing to meet expectations can negatively impact the share price, at least in the short term.
To thoroughly understand a company’s financial health and predict the potential direction of its share price, it’s beneficial to analyze its historical data, especially previous earnings predictions and outcomes.
By examining past quarterly earnings reports, you can gain insight into how the market has typically reacted and what might be expected in the future. If the share price has historically shown significant movement following an earnings report, this indicates that market sentiment is likely influenced by these announcements. However, if there’s less price movement, other factors might be playing a more significant role in influencing the share price beyond just the earnings report.
Draw up a plan – then stick to it
Formulating a well-thought-out strategy is crucial before diving into trades based on earnings announcements. This involves several key steps:
- Creating Entry and Exit Rules: Define clear criteria for when to enter or exit a trade. This can be based on specific price points, time frames, or changes in market conditions.
- Establishing Profit Goals: Set realistic profit targets to help guide your trading decisions. This can help in measuring the success of your trades and keeping expectations in check.
- Allocating Time for Trading: Decide how much time you can realistically dedicate to trading. This includes time for research, monitoring the markets, and executing trades.
- Developing a Risk Management Strategy: This is perhaps the most crucial aspect. It involves setting stop losses and limit orders to define the bounds of your trades. Stop losses help limit potential losses by automatically selling at a predetermined price point, while limit orders can lock in profits by selling once a certain profit level is reached.
By adhering to these predefined trading parameters, you can minimize emotional decision-making, which is often a pitfall in trading. A disciplined approach helps maintain a logical perspective and keeps you focused on your overall trading objectives. Remember, the key is not just to make profitable trades but to trade profitably in a consistent and
The Bottom Line
Once each earnings season comes to a close, it’s also worth investors reviewing the results of any associated trades they have made and analysing both what worked for them and what didn’t in terms of financial outcomes.
Trading strategies take time to come to fruition, and learning from each season can help pave the way for a successful investing journey ahead. Watching and understanding how companies typically behave during earnings season can ultimately work to the benefit of the informed investor.