How to Read an Earnings Report

If you've been invested in the market for at least 3 months, you have most likely heard the term "quarterly earnings". But, what are these earnings reports and why do they matter so much to the company's stock? Let's dive in!

What is an Earnings Report?

An earnings report is irritably similar to a report card, except if you're publicly traded on the stock market, you can't hide it from your parents. In all seriousness, this earnings report updates the shareholders how much money the company has made, how much they have spent, and any other important financial information I'll expand on below. Overall, the goal of these earnings reports are to show whether the company is doing better or worse then expected by comparing their real numbers to the projections they made, prior to the earnings report.

Look Out For...

There are three specific things released in a quarterly earnings report that are a must read. These three are:

1. Earnings Per Share (EPS)

2. Net Income (Profit)

3. Revenue (Sales)

I'm sure everyone reading most likely knows what revenue and profit are. As for EPS, feel free to check out a prior Monk article that explains it in plain English! I ranked the big three in the order that I believe is most important, though all three should be analyzed. The big three are substantial to look at; even the slightest missed projection can create a catastrophic day on the market for a stock.

While the big three should be your first stop for reading an earnings report, there are other things an earnings report encompasses. Look at the forecasts and projections they created: are they realistic? Has the company consistently beat them? More importantly, what historically does the following trading day look like after earnings? Next is debt and expenses, these are especially important if it's a company you've never heard of. No need for deep analysis, just make sure they aren't drawing in debt or created a hole too deep for themselves. Finally, use the year-over-year (YOY) and quarter-over-quarter (QOQ) timeline for almost any statistic. Make sure the company has consistent growth, and you can count on them rebounding no matter the circumstances.

The Thing Is, No-one Cares!

Now that you know how to read earnings, as long as you invest in companies with great records you can't lose money, right? Of course not! In fact, the truth is that Wall Street doesn't care what standards the company set, they only care about how their numbers compare to the expectations Wall Street themselves have created. For example, Nvidia (NVDA) has been the talk of the town as they are the titan in AI. Therefore, their growth has been astounding – beating earnings consistently, record revenue, the whole 9 yards. But, Wall Street was simply expecting more. This is why they can beat earnings by 10%, and the share price will go down 5% the next day; they simply didn't impress Wall Street enough.

Is there something you look at in an earnings report that I didn't mention? Let me know in the comments!