A Primer on U.S. Corporate Earnings~Part 1 ~ Everything you ever wanted to know about corporate earn
It’s corporate earnings time again. That time of fun and frolic where public companies tell the world of their triumphs and misadventures during the past three months and Wall Street votes yea or nay on the tale.
Four times a year, Wall Street turns its collective eyes almost exclusively to earnings. But the non-Wall Street crowd often wonders what all the fuss is about and those new to investing may not even understand how the whole process works.
For those looking for a better understanding of corporate earnings – this blog’s for you. For those who know the basics, move on to earnings primer part two: “The Earnings Dance.”
My daughter once said to me “Mom, all you ever do is earnings!” There may have been some truth in that. By my estimate, I’ve written up at least 1,000 earnings reports while I worked as a reporter for Bloomberg News. So while I’m not a Wall Street analyst, I do know a thing or two about the beast and what follows is my take on what I’ve learned.
Let’s start by answering some basic questions.
What’s a public company?
A public company sells stakes in its financial fortune on an open exchange. The market determines the value of the company by trading shares on a daily basis. A private company is one in which the general public can’t buy shares. We don’t really care about the financial performance of a private company. If we can’t make money on them, why would we? That’s rhetorical.
What are corporate earnings reports?
By law, public companies are required to provide a clear statement of their financial status four times a year. Once a year they also provide an extremely in-depth analysis of their business. The reports contain a company’s most recent balance sheet, income statement and statement of cash flows as well as other items including lawsuits or other issues of interest to investors. The reports are submitted to the U.S. Securities and Exchange Commission on a prescribed time table. You don’t think they’d do all this without being forced do you? Again, rhetorical.
Why are investors interesting in earnings reports?
Investors use the information provided in earnings reports to make decisions about the value of the company. They look at a variety of categories including sales, profit, cash, inventory, cost of goods sold and compare those items to the year ago quarter. So if this is the second quarter of 2014, they look at the same category of items from the second quarter of 2013. They also may compare consecutive quarters, but many companies have seasonal businesses so looking at what happened in the same quarter the year before is more beneficial to understanding the company’s financial progress. Investors make a decision about whether to buy the stock from looking at the health and progress of the company and comparing it to their own financial strategy. Very importantly investors look at what the company says about upcoming quarters. That’s called the earnings forecast. It’s an important item.
How does the investor make money off a public company?
Generally in three ways: When the stock price goes up; when a company buys back its own shares, and through dividends that some companies give out to investors quarterly.
How are corporate earnings reported?
Companies are required to provide the financial report to the SEC through a filing called a 10-Q. The Q stands for ‘quarter.’ The in-depth financial report done once a year is called a 10-K. No one knows what the K stands for. Most companies will also write a press release summarizing the key points of their SEC filings.
When are corporate earnings reported?
Companies must report earnings somewhere between 30 and 90 days after the end of each quarter, depending on circumstances. Quarters are generally closed at the end of March, June, September and December. Some companies follow a fiscal year. A company often picks its fiscal year based on its business cycle although many fiscal years end September 30, including the U.S. government’s. Companies that have fiscal years ending say in March are just trying to give you a headache.
Companies generally will tell the public, often to the exact minute, when they will issue their earnings report. They usually do this by issuing a press release several weeks in advance. If a company cannot, for whatever reason, turn in their report to the SEC on time, they must file a form requesting an extension. If a company delays its earnings report, that’s a bad sign. Investors don’t like when this happens.
Is there a difference between the press release and the SEC filing?
There can be significant differences, but there aren’t always. The press release doesn’t have to provide the specific information required by the SEC. The press release is NOT the final word on a company’s performance; the SEC filing is. The press release can be, and generally is, corporate spin. Investors will scan the SEC filing for differences from the press release. They also look at the SEC filing for warnings, investigations and lawsuits that the company may have chosen not to highlight in a press release.
What do public companies do with the money we give them when we buy shares?
That’s what corporate earnings tell us: What exactly ARE they doing with the money?
Part 2 of this primer will deal with the interplay between companies, investors and analysts related to corporate earnings.
By Carol Wolf
Carol Wolf is a freelance ghostwriter and wordsmith. She can be reached at CarolWolfMedia@gmail.com