Overview of Earnings
Earnings are essential to understanding the financial health of any exchange-listed company. Consequently, earnings announcements are one of the core financial data-streams baked into the NewsQuantified platform.
In this guide, we go over the basic terms and fundamental insights needed to understand earnings, how they’re reported, and how they drive market dynamics.
We offer a look at stock-specific earnings reports as a free service to the public. You can check out the latest earnings reports on News Quantified's stock-specific pages by typing the stock's name or symbol in the search bar on the top of the page.
For example, if you type Intel or INTC, you’ll get to Intel’s page: https://www.newsquantified.com//INTC . Then, click on the Earnings tab to see recent earnings reports.
An excellent source of earnings research is the "Investor" section of most public corporate websites. Here, the firm provides a discussion of its recent financials and links to annual reports, SEC filings, conference calls and press releases. High-quality companies usually provide contact information for more specific questions about the company.
If you understand how earnings work and are more interested in how NewsQuantified integrates this data into a professional-grade analytics platform, you can read more about our platform here.
The Importance of Current and Future Earnings
Ultimately, earnings data drives stock price changes. More earnings allow a company to expand, invest in cost-cutting technology, buy back shares, and/or pay dividends. Earnings create shareholder value, which is precisely what investors are trying to pay for.
Often, investors bet on future earnings by purchasing stock in a company that is currently losing money. Tesla is a powerful example. Tesla has lost a significant amount of money every quarter, yet the stock price has been generally rising. This is also true of many companies with tight cash flows but dramatic growth potential. In these cases, investors will read the earnings release and look for a trend toward profitability.
Facebook is a great example of how this strategy can pay off: Facebook was losing money when it first issued public stock, but investors bet that a huge user base would ultimately make money: and it has!
At the same time, this strategy failed many times during the dotcom bust: many high-flying dotcom companies went bankrupt without ever making any money. Earnings growth is the “greatest catch” for investors, but predicting it is rarely simple!
The Basics: Definitions and Simple Metrics
What Exactly Are Earnings?
Earnings, profits, net income, and "bottom line" are all functionally the same thing: the amount of money a company make after expenses. These earnings are reported according to standards called Generally Accepted Accounting Principles (GAAP). Enforced by regulators for publicly traded firms, they theoretically allow us to make apples-to-apples comparisons between companies. But there are lots of exceptions to GAAP—so beware!
Who Are the Analysts? How Are Earnings Estimates Generated?
Analysts are professionals trained to understand financial statements and to project the future Earnings of a Company. Common names for this role include research analyst, financial analyst, securities analyst, investment analyst, equity analyst, or ratings analyst. They potentially make use of a vast sea of data, including sales and expense forecasts, management quality, supply & demand conditions for key inputs and outputs, macroeconomic trends, competition, and emerging technologies.
The end result of the analyst's work is a research report with a set of financial estimates, a stock price target, and a recommendation about whether to buy, sell, or hold the stock.
We explore how these predictions work in a bit more depth here. Our analysis of these “Analyst Actions” is a core part of our approach to trading.
Analysts often specialize in a particular industry or sector. They ultimately rely on information provided to them by the company they are evaluating, so we can’t expect insight into secret developments: these projections are founded on statistical models
These professionals are employed by a variety of financial firms. Depending on their employer, an Analyst is categorized as "buy-side" or "sell-side". This confusing term has nothing to do about whether an Analyst is recommending to buy or sell a stock. Buy-side analysts typically work for mutual funds, hedge funds, pension funds, trusts, and other non-brokerage firms. As such, they are interested in making trading recommendations that benefit their firms' clients; their research is often a closely-held secret for the benefit of their customers.
Sell-side analysts work for brokerage firms like Schwab, Goldman Sachs, or Wells Fargo, and their research is widely disseminated in an attempt to increase trading business. Sell-side analysts are often utilized by Companies to promote their stock. The upgrades and downgrades that are published on a daily basis are coming from Sell-side analysts.
We go into a bit more depth and “analyze the analysts” in our blog post here.
Earnings Per Share (EPS)
Every share of stock represents legal ownership in a company. This fundamental metric shows how much earnings are associated with each share of a stock.
It can be calculated easily: it’s simply the ratio of (Total Earnings)/(Total Shares). This number is useful for comparing earnings between companies on a share-by-share basis.
Let's take Intel as an example. If Intel reports Earnings of $1 Billion dollars and 100 Million shares of Intel have been issued, then Intel's EPS would be ($1 Billion Dollars)/(100 Million Shares) = $10/share. Large and growing EPS signals financial strength, and this often drives up the stock price (and vice versa).
EPS is most useful when comparing companies in similar industries. For example, comparing Intel and IBM's EPS provides key information about the relative value of the two companies' stocks.
By law, publicly traded companies in the U.S. must report earnings every 3 months. Most companies use the calendar year to organize earnings reporting, ending each financial quarter on the last day of March, June, September, and December. The weeks following the end of those months are known as “Earnings Season” because that is when most earnings are reported. Note, however, that companies can use any rolling 3-month period to release earnings.
Earnings Releases: Beat or Miss?
Analysts working for financial firms like Goldman Sachs spend a lot of time and money attempting to predict what a company's earnings will be. And companies put a lot of effort into providing guidance to the analysts. Their goal is for earnings that will meet or exceed the estimates almost every time.
Large companies like Google or Facebook may have 50 or more public analysts making estimates for their upcoming earnings. The average of these estimates is often called the "consensus" earnings estimate.
If a company releases earnings that are above the consensus estimate (also called "beat" or "surprise"), the stock often moves higher. Conversely, a stock can move lower if the earnings are below the consensus estimate (also called "miss" or "disappoint").
Trailing vs. Forward Earnings
"Trailing" earnings are actual results: earnings from the last quarter or year. "Forward" earnings are those forecast by the Company or an Analyst. The quality of a Forward Earnings number is highly dependent on the quality and integrity of the Company and the Analyst.
Price Earnings Ratio (P/E Ratio)
A stock’s price-to-earnings ratio (often called P/E ratio), is calculated as the stock price divided by earnings per share.
The P/E ratio allows us to compare a stock’s earnings with its actual price. Traditionally, a company with a high price compared to its earnings may be considered overvalued. Likewise, a company with a low price compared to its earnings may be undervalued. We prefer not to think in terms of hard rules for desirable P/E ratios, because they can vary so much between industry and sector.
Of course, P/E ratios can be a bit misleading. They’re a great back-of-the-envelope method for valuing a stock but should always be paired with deeper research. You can read more about the uses and limits of this classic metric in our blog post here.
Timing and Reporting of Earnings Announcements
The Securities & Exchange Commission (SEC), the chief US body regulating the stock market, requires public companies to publish earnings reports no later than 35 days after the end of their first three quarters, and their annual earnings report 60 days after the end of their fiscal year.
The official reporting of quarterly earnings is done by filing Form 10-Q or 10-QSB ("Q" is for "Quarterly", "SB" is for "Small Business").
Annual earnings reports use Form 10-K or 10-KSB ("K" is for annual).
A company can file these reports anytime within the timeframe specified by the SEC, including after they have released earnings through their own public press releases. Consequently, SEC reports often lag public earnings announcements (NewsQuantified tracks both). Note that Form 8-K is used to report special material information that occurs in the time between quarterly reports.
Many websites will show you the release dates for upcoming earnings reports of publicly traded companies. This data is typically organized as an “Earnings Calendar”. There are various free and paid sources for this information. News Quantified has partnered with Wall Street Horizon to provide subscribers with reliable earnings data.
A 10-K report is a very detailed form filed annually by all publicly traded companies. Unlike the fancy and photo-filled Annual Reports published by companies for shareholders, the 10-K report is written in a clinical and highly organized fashion specified by the Securities and Exchange Commission (SEC). It contains virtually everything an investor may want to know about a company: their markets, risks, competition, legal proceedings, corporate agreements, organization, executive compensation and, of course, 5 years' history of financial information. The 10-K report has the advantage of being organized in the same way for all companies.
It's well worth it to learn how to read a 10-K report when considering where to invest your money. We take a deeper dive into understanding this data-rich document here.
10Q Reports are much shorter by comparison, focusing more tightly on reporting the most recent earnings numbers.
These reports are published and stored by the SEC using a system called EDGAR (EDGAR stands for Electronic Data Gathering, Analysis, and Retrieval). It’s a searchable historical record of formal filings for all public companies. You can explore it yourself using this link.
Earnings Press Releases
Companies are required by the Security and Exchange Commission's "Fair Disclosure" rules to widely publicize their Earnings in a way that doesn't give any investor an advantage over another investor. This regulation has done a lot to level the playing the field and make earnings-based trading approaches accessible to investors without connections in the big Wall Street firms.
Most Companies use news wires like Business Wire, PR Newswire, Globe Newswire and Marketwired to publish their Earnings because it guarantees broad distribution of the news that fulfills their legal obligation (our platform tracks each of these news wire services).
Earnings News Releases are analyzed almost instantly by investors and analysts, often causing the stock to move up or down in short order.
The news release is written by the Company itself, so it will present the information in the best possible way. Earnings news releases often contain guidance about future earnings and business prospects in general. In addition, a publicly-accessible conference call is usually scheduled within 48 hours of the press release. It’s intended to allow investors to discuss the new earnings numbers with management.
Understanding the Crucial Pre- and Post-Market Sessions
Most investors know that US stock markets are regularly open between 9:30am-4:00pm Eastern Time. It’s true that most trading is done during these hours. But with the advent of computerized trading, it’s also possible to trade before and after the regular market session. Pre-market trading is possible between 4am-9:30am Eastern Time and Post-market trading occurs from 4pm-8pm Eastern Time.
As you might expect, the volume of trading during the pre- and post-market sessions is a small fraction of the main session. Consequently, it is sometimes difficult to match up buyers and sellers for thinly-traded stocks. This means prices will often see bigger swings and the difference between the Bid and Ask prices can be large. "Market" orders can be dangerous in pre-& post-market sessions, especially with lightly-traded stocks in smaller companies.
Companies almost always release their Earnings outside of the normal market hours. In theory, this timing is to give investors a chance to thoroughly understand the Earnings before the market opens the next day. However, savvy institutional investors often act as soon as possible on Earnings information. If a company beats or misses the consensus forecast, the stock's price often moves so quickly in the pre- and post-market session that by the time the main market opens, the price has already exhausted most of its initial momentum.
Access to analytics that cover extended hours are essential for investors hoping to compete with large institutional players. We recap some academic research indicating the predictive power of extended hours news events here.
Most brokers now offer pre- and post-market trading to all of their clients. Check with your own broker for the fine print about how they operate during these sessions.
Cutting Through the Jargon: Earnings Glossary
Financial analysts at investment firms make an entire career out of analyzing earnings reports; it’s rarely a simple process. Most investors rely on information from these professionals rather than grinding through the analysis process themselves. It is important, however, to understand how the analysis is done and the terminology used to report the results.
Operating Earnings (EBIT)
Operating Earnings are Earnings Before Interest and Taxes (abbreviated EBIT). By ignoring tax and interest expenses, this metric focuses tightly on a company's ability to generate earnings from operations, ignoring taxation rates and debt load. EBIT can be useful to determine if a company could be valuable if bought out and its tax rate or debt load were changed. "Operating Earnings" is not defined by GAAP (Generally Accepted Accounting Practices) and therefore one must know exactly how the number is calculated before using it for investing decisions.
Earnings Before Taxes (EBT)
Earnings Before Taxes (EBT) is calculated by ignoring taxes as an expense in the Earnings calculation. This is useful when comparing Companies in locations with different taxation rates. In another example, the latest Tax Reform Legislation of 2018 has resulted in some large one-time tax bills that distort the after-tax earnings, so EBT could be used to remove this impact on earnings.
Fully Diluted Earnings
Fully Diluted Earnings is calculated by dividing Net Profit by the total number of authorized shares, not just the shares currently outstanding. When a Company has issued warrants, convertible Notes, or stock options, these items increase the outstanding shares when they are exercised. Adding these "future" shares to the currently outstanding shares to calculate Fully Diluted Earnings provides a picture of how Earnings may look in the future. We go over “Earnings Dilution 101” here.
Adjusted Earnings or non-GAAP Earnings
Analysts and companies often call special attention to earnings that exclude one-time expenses. These Earnings are often called "Adjusted" or "non-GAAP". For example, if a company suffered a significant one-time loss during a hurricane, this loss lowers the quarterly earnings and obscures the normal growth of the company's business. As implied by "non-GAAP", there are no accounting rules to specify how these Earnings are calculated. It is very difficult to compare these Earnings between Companies.
Various legal accounting adjustments can be made to manipulate earnings for a particular quarter. It's more difficult to manipulate earnings in the long run. Financial Analysts looks for these tricks when examining the fine details of the Company's Profit and Loss statement. For example, a company could slow its rate of capital asset depreciation, thus apparently increasing its earnings. Unless you are training in accounting, rely on experts to find and explain earnings management.
Earnings and Beyond
Nothing stands more fundamental to a stock’s value than its ability to, well, make money.
But we’ve seen how complex actually measuring that ability can be. What if a stock is losing money now but has huge earning potential? What if a stock beats every time, to the point that narrow wins are treated as poor performances by markets?
To have any hope of profiting from those dynamics, we need professional-grade historical data tied to real-time analysis of emerging earnings announcements. The fact is, human behavior in the stock market doesn’t change that much over time. Which means history isn’t just a summary, but a predictor. Individuals are reacting to stock impacts today much as they did when our system was created in 2005. Even during world-shaking events like the 2008 financial crisis, traders continued reacting to news events as our platform predicted. Which is why NQ is still thriving today: because investor reaction to trend-setting information is a fundamental behavioral attribute that isn’t changing any time soon.
If you’d like to learn more about using data to profit on earnings news (a practice hedge funds have been cashing in on for decades), we’re pleased to invite you to our ongoing live virtual training seminar series. You can claim a space in our next session using the button below:
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