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If you’re new to stocks and find yourself looking at tickers for investment inspiration, the sea of ever-changing numbers may be confusing.
And when you realize that stock prices are based on investor demand – and therefore sentiment – you may come to think of investing more like gambling on investors’ whims rather than the actual value.
But while stocksdo move with investor sentiment, each investment is also underpinned by the underlying company’s financial value.
And since each publicly-traded company must file a quarterly earnings report with the SEC, you can access this information for real insights into a company’s health. Preferably before you trust them with your hard-earn money.
What is a Quarterly Earnings Report?
All publicly-traded companies must file a Quarterly Earnings Report, or 10-Q form, with the SEC every three months.
This document is accessible to anyone who cares to look and often plays a key role in setting share prices in the stock market.
Broadly speaking, a company’s quarterly report is a collection of accounting statements that contain the company’s profit and loss for the previous quarter. The report also documents other key indicators of financial health, potential challenges, and strategic advantages.
But exactly what the SEC requires a company to report can vary wildly. For instance, Facebook is unlikely to file a mine safety report, while Southern Copper Corporation probably will.
The idea is that a company provides all the numbers that impact its current and future performance.
As such, a mix of financial and business analysis, crucial disclosures, and strategy are included with the headline numbers.
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Understanding the Quarterly Earnings Report
Though quarterly earnings reports play a key role in setting a company’s share prices, understanding the contents isn’t always easy.
The fact is that corporate accounting practices can be complex, often spanning dozens of pages of dense technical jargon. And the government’s reporting requirements don’t make interpreting earnings reports any easier.
If you know exactly what you’re looking for, you can learn a great deal about a company’s financial and strategic performance.
But even professional analysts often find them overwhelming, which is why most media coverage instead focuses on the earnings release.
What is an Earnings Release?
Companies face a bit of a conundrum with quarterly earnings reports: four times a year, they must publicize a crucial, difficult-to-understand financial document for SEC review.
Then, they have to hope it’s not ignored or misunderstood by their investors – or read by an analyst who pulls out one unflattering number and tanks their share prices.
To address this issue, many companies instead release the information to the public in a way that they can control. This is what’s known as an earnings release, which may then be followed by an earnings call.
Earnings calls are publicly accessible calls made by a company’s management to the press and board members. Anyone may dial into a call, which typically begins with management noting that any predictions are not guarantees.
Then, management launches into what amounts to a sales pitch for the company based on their quarterly earnings report. During this segment, they choose what facts to cover and how to present them in a flattering or mitigating light.
For instance, a company facing significant legal challenges may very well have had to include that fact in their Q-10, and an analyst crawling through the mountain of minutia may have picked up on that disclosure and trumpeted it in the media, potentially tanking share prices.
If company management can instead spend an hour extolling the virtues of their new push to manufacture sand for the Sahara, the attention to that just might drown out the bad news also in the report.
The only trouble in maintaining a narrative comes in the optional last section, a Q&A with analysts, but a disciplined team can answer any questions carefully and keep the focus where they want it.
The advantage of an earnings release is that companies can present their financial information in an easier way to understand than the official filing.
The downside is that, because such presentations are voluntary, some companies only have them if they think they can improve their prospects by doing so.
That’s why, as an investor, if you read a company’s earnings release rather than its quarterly earnings report, it’s important to recognize the difference between cold, hard facts and corporate salesmanship.
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Significance of the Quarterly Earnings Report
If you want to invest in the stock market, recognizing the difference between a fast-growing company and one that’s about to go bankrupt is crucial.
And while you can’t know the future, picking companies with a history of healthy financial performance is often in your best interest.
That’s what makes being able to look at a legally binding document (or, more likely, a professional analysis or earnings release) containing vital financial records so valuable.
Aside from your interest as an investor, a company’s quarterly earnings report can also impact a company’s stock in a broad way as other investors – and media outlets – digest and respond to the information.
In fact, it’s not uncommon to see a company’s stock fluctuate suddenly and dramatically in the days following its earnings report before returning to normal.
Who Regulates Quarterly Earnings Reports?
Quarterly earnings reports are regulated by the Securities Exchange Commission, or SEC. One of the advantages this gives is that companies must complete 10-Q forms accurately, completely, and on time to avoid fraud charges, which provides extra peace of mind for prospective investors.
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Quarterly Earnings Report FAQs
Quarterly Earnings Report Definition
Every three months, all publicly traded companies must file a 10-Q form with the SEC that contains an accounting of their financial performance. Exact requirements vary by industry, size, etc., but typically, the profit and loss statements get the most attention (at least from an investors’ viewpoint).
What is an Earnings Release?
Many companies also do what’s called an earnings release (press release) as well as an earnings call when they file their 10-Q form. This gives the company a chance to announce the contents of the earnings report to the public, particularly journalists and investors, in a controlled setting wherein they can:
- Discuss the official report
- Highlight and explain any beneficial or troubling sections
- And present the data in an advantageous light
Earnings calls may also include a Q&A, during which participants and analysts can ask questions to members of company management.
Is an Earnings Release Required?
Unlike the quarterly earnings report, which is required by the SEC, earnings releases are voluntary. Each company can decide on a quarterly basis whether discussing their results will benefit them or whether they believe canceling is in their best interest.
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Why is an Earnings Release Important?
An earnings release gives companies a chance to present, explain, and perhaps even spin their quarterly earnings reports. While earnings releases provide crucial insights into the thinking and plans of a company’s leadership, it’s also worth remembering that management has an incentive to paint its results in the best possible light.
What Happens to a Stock When Earnings are Released?
Prospective and current investors watch a company’s shares in the week before and after its earnings release. It’s not uncommon to see dramatic positive and negative changes in a company’s share price following its release.
If you’re a long-term investor rather than a short-term trader, you needn’t be overly troubled by short-term swings. That said, a series of bad reports may indicate a company isn’t as dependable as you thought.
Bottom Line: Quarterly Earnings Reports
A company’s quarterly earnings report is more than just a legal document outlining a firm’s financial and strategic performance.
In recent decades, it’s become a way for companies to connect with their investors by way of earnings releases – and for investors to gauge the value of their investments more accurately by peeking under the hood.