Part I: Earnings Reports Explained & Where To Find Them
If you’re an experienced trader of stocks or stock CFDs, it’s probably wise if at some point you take a step back to understand more about company earnings reports, and how you can use them to improve your trading.
Charts are a great way of understanding price action, but earnings reports help you understand the company you’re looking at, and serve a more fundamental role as the “prequel” to the chart.
You could be wasting plenty of time looking at a stock’s price if it’s not a stock you should be trading anyway.
That’s why in this two-part article, we’re going to teach you what an earnings report is, where to find them, what’s included in them, and what you should be looking for when you review one.
Let’s get started.
What is an earnings report?
A company’s earnings report is a document that every publicly traded company is required to produce both quarterly (a 10-Q report) and annually (a 10-K) report.
These documents detail the financial position of the company and include other relevant information that’s of interest to current shareholders and potential investors.
For this article, we’ll be looking at US companies and using the terminology of US 10-Q reports.
In the US, the trading of shares on exchanges is regulated by the SEC, which also creates and governs the rules regarding earnings reports. While companies regulated by the SEC are required by law to produce these reports, they also serve a useful purpose for the organisations themselves, who use it as a “sales pitch” to onboard potential investors.
And as a trader, you can use these reports to figure out whether a company’s share price may be headed up or down, based on factors such as management structure, financials, market risks, legal obstacles, and many more.
In short, the earnings report is a great way to gain insight into a company’s health, but it takes patience and a little know-how to extract the maximum value from these reports.
What’s The 10-Q?
The 10-Q is SEC jargon for the quarterly earnings report, which is the document we’ll be focusing on in these articles.
The 10-Q is a little more valuable than the 10-K, which is more lengthy and unnecessarily showy, with a whole bunch of images, photos, and highlights that are there to make the report look fancy, but aren’t very relevant to you as a trader.
Here’s a quick look at Apple’s most recent 10-Q from July 2021.
So what’s included in a 10-Q that makes it such a valuable report? Well, in every report, there are two main parts, the financial information and the other information.
The financial information is the part that investors and traders will concentrate on the most, although the other information section can prove valuable as well.
The financial information category includes, as you might expect, financial statements, as well as other sections such as management comments, financial analysis and market risk analysis.
Here’s what Apple included in Part I of their 10-Q this week:
And here are the contents for part II (other information), which includes topics such as legal proceedings and risk factors.
Let’s break down the most important sections a little further.
The most important section of the part called Financial Statements is, you guessed it, the actual financial statements themselves. Annoyingly, these can be quite long, but in the second part of this article we’ll break down exactly what to look for to help you slash the time you spend sifting through the reports. Most traders don’t need to know every detail of these statements.
In short, these financial statements are required by the SEC and show key figures such as revenue, expenses, assets and liabilities.
Here’s a look at the first page of Apple financial statements:
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Item 2 of this part of the report is called “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
In this section, the company’s management discusses the overall performance of Apple Inc. They cover topics such as the covid-19 pandemic, recent product releases, and performance by region.
Quantitative and Qualitative Disclosures About Market Risk
The SEC summarises the requirements for this section as follows:
“On January 28, 1997, the Commission adopted new rules that require disclosures about the policies used to account for derivatives, and certain quantitative and qualitative information about market risk exposures.”
In this section, companies are required by the SEC to explain all existing legal action being taken by or against the entity.
The risk factors section is arguably one of the most interesting of the 10-Q report and largely consists of common-sense arguments regarding the marketplace.
This is where companies take the opportunity to explain areas that are, or may in the future, negatively impact it. This way, you can get a good sense of the challenges the company is tackling, what’s at the top of their mind, and if they’re being serious in their efforts to overcome the obstacles in front of them.
These days, risk-factor sections are likely to be overwhelmingly centred around the challenges presented by covid-19.
What is earnings season?
As a trader navigating your way through forums and news sites, you’ll often come across the term “earnings season”. This is a phrase used for the period between when companies begin to report their quarterly earnings and when most companies have wrapped up their earnings releases. This usually tends to be in the weeks that follow the close of a financial quarter.
These “seasons” usually come early in the month in April, July, October and January.
The SEC requires that organisations report their 10-Q between 40 to 45 days after the close of the fiscal quarter. For larger companies, the SEC may request an earlier submission.
Where to find earnings reports.
There are several good ways to get your hands on the latest earnings reports of companies. One of the most convenient ways is through the SEC’s website.
The SEC’s EDGAR system lets you search for any publicly traded company in the US and pull up their latest earnings reports, as well as other relevant company documents.
Most companies will also publish their reports on their website, and a quick Google search should pull up the latest 10-Q.
That’s it for part I of our look at earnings reports. In the next part, we’ll get down to the nitty-gritty of how to read earnings reports to help you make smart, informed trading decisions.
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