8 Things to Look For in a Quarterly Report
If you own stocks, you've likely gotten a quarterly report from the company in the mail. The thick booklet contains a balance sheet, income statement, cash flows and explanatory notes.
But if you're trying to determine if your stock will perform well, it can be difficult to know what to look for, since you're wading through a report that contains both positive marketing from the company and information to keep investors informed according to Securities and Exchange Commission regulations.
Certain things in the report will indicate how your stock is doing in the market.
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"Knowledge is the most powerful commodity on the planet and in today's world, investors have the ability to do very well by doing their own homework," says Adam Sarhan, chief executive of 50Park.com, an investment and advisory firm. "It is easier than ever to access the information you need to make sound decisions in the market. The key is to be able to filter out the noise and focus on what matters most."
Save a few of them. It may be tempting to add them to your recycling bin, but if you save them each quarter, you'll be able to compare the reports over time. The comparisons can give you key details on management and your stock's ability to perform.
Earnings per share. First, investors should read the company's quarterly revenue and adjusted earnings per share, or EPS, said Nathan Yates, director of research and consulting at Forward View Consulting in Clintwood, Virginia.
Then, determine whether or not the sales and EPS meet, exceed or miss the consensus estimates of analysts covering the company. "The variance between the Wall Street consensus and actual results will greatly affect the short-term share price and give insight on how well the firm is meeting expectations," Yates says.
Also, remember to use adjusted EPS, the benchmark for analysts, which strips out one-time accounting items, he says.
Compare the company's guidance over time. Most firms provide guidance, which gives expected results for the next quarter and sometimes the full year. Compare the current guidance with previous corporate forecasts and then with the analysts' consensus, Yates says. "Guidance will have a significant impact on the firm's stock over the long term, and the trend in the company's own predictions can be very revealing," he says. "It's also worth researching if management guidance is generally accurate."
Sales and earnings consistent growth. "Two important criteria investors can look for when reading a quarterly report are sales and earnings," says Matthew Tuttle, CIO of Tuttle Tactical Management.
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Try to compare your stock's data over more than one quarter. "Investors who find stocks that are able to consistently grow their sales and earnings tend to do well in the long term," he says. "That is a great way to find leading stocks in the market."
Sound balance sheet. In the simplest sense, a sound balance sheet allows investors to ascertain the underlying health of a company, Sarhan says.
But how do you know what is sound? "All things being equal, a company that can consistently grow its top line (revenue) and bottom line (earnings) quarter after quarter and year after year tends to do very well in the market," Sarhan says.
Regarding revenue, "investors should look for any red flags or possible accounting irregularities to make sure everything is legit," says John Del Vecchio, co-manager of AdvisorShares Ranger Equity Bear exchange-traded fund (HDGE).
Measure cash flow. "Cash flow analysis is an important metric that allows investors to see how the company is managing its cash," Sarhan says. Positive cash flow obviously occurs when more cash is coming in than going out, which means the company makes more than it spends on a monthly, quarterly or annual basis.
"Some examples in recent years are: Apple (AAPL), Google (GOOG, GOOGL), and Microsoft (MSFT), just to name a few," Sarhan says. "Normally, we look for double-digit sales and earnings growth over the past three to six quarters. That is not a hard rule but it always helps."
Accounts receivable. Specific warning signs can signal potential problems to investors, says Robert Johnson, president and chief executive of The American College. "Accounts receivable and inventories should grow at roughly the same rate as sales. If a company's sales revenues grow at 10 percent, yet accounts receivable and/or inventories grow at 25 percent, there could be significant problems within the company," Johnson says, as the company is not turning sales into cash at the same rate as it did before. "If the company is doing an adequate job of collecting from customers, receivables should grow no faster than revenues."
Read more than the quarterly earnings press release. To dig a little deeper, head to the filings with the SEC, which are available online. "The filings are much more robust than the press release," says Holms Osborne, chartered financial analyst at Osborne Global Investments. "Most press releases don't even list the balance sheet, which can only be found in the SEC filings."
Sarhan looks to see if the company has it all -- good sales and earnings growth, a sound balance sheet, strong positive cash flow and little to no debt.
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"When I find a stock that is beginning an uptrend and sports strong fundamentals, the story becomes very appealing," he says.
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