Stock Market Basics: How to Read Earnings Reports

We are currently in the thick of earnings season: the time at the end of each fiscal quarter during which a large number of publicly traded companies release their earnings reports. These reports offer a snapshot of a company's financial health, and are an invaluable resource for investors – but only if you know how to read them. We've created this guide to help novice investors identify and decipher the most vital information contained in earnings reports.

Why do companies issue earnings reports?

All publicly traded companies in Canada are required to disclose their financial performance on a quarterly basis. They do so by filing pertinent documents on SEDAR, otherwise known as the System for Electronic Document Analysis and Retrieval. Typically, companies also issue a press release containing an explanation of their performance over the previous quarter and relevant financial data. On TMX Money, these press releases appear directly on a company's quote page, alongside their most recent financials. TMX Money also has a comprehensive earnings calendar, which you can use to track when companies will be issuing their report.

What are some key performance indicators in an earnings report?

Earnings reports can be intimidating at first glance; they typically contain a number of acronyms and dense tables of financial data. But, by focusing on a few metrics in particular, you can quickly perform an assessment of a company's health.

Revenue vs. Income

The words "revenue" and "income" are often used interchangeably in everyday life; however, in the context of an earnings report, it's important to understand the distinction between the two. Revenue refers to the total amount of money generated by the sale of goods and services that are related to the primary operations of the company. Income, by contrast, refers to the bottom line. It is also known as net income or net profit, and comprises the total amount of money left over from revenue after all expenses have been deducted. Generally speaking, companies that generate income are financially healthy. That said, there are some exceptions to the rule – startups or companies that spend a great deal to foster growth and innovation, for example.

What is EPS (Earnings Per Share)?

In simple terms, EPS is net income (minus preferred dividends) divided by the total number of outstanding common shares. Because the number of issued shares often changes over time, companies tend to use a weighted average of outstanding shares when performing this calculation. EPS is one of the most popular indicators of profitability. In essence, it describes the amount of a company's profit allocated to each share of outstanding common stock. Say, for example, that a company earned a net profit of $5 million in 2016 and $10 million in 2017. It would appear, on the surface, that their profitability doubled. If, however, the number of outstanding shares were to increase during this period from 5 million to 20 million, the EPS would actually have declined from $1.00 to $0.50. This calculation is more indicative of the company's value to shareholders than the increase in profitability. Though useful, EPS should not be used to make investment decisions in isolation.

Earnings Beat vs. Earnings Miss