Covering earnings is increasingly done by robot reporters, which can instantly create reports with the most important figures from the complex quarterly financial statements. That’s because earnings articles are incredibly timely. As soon as the market closes at 4 p.m. EST, investors are anxiously searching for coverage of whichever earnings were scheduled to release that day.
But even if robots do eventually take over all earnings articles, it’s still important for business journalists to understand the reports. Because while robots can do the quick, initial earnings posts, it’s up to business journalists to write more in-depth, follow up reports that provide more context for the figures.
So if you’re new to business journalism, here are six basic figures to pay attention to in earnings reports.
While it’s called an earnings report, there’s just one figure that’s specifically called “earnings.” A company’s earnings, also known as profit or “the bottom line,” is the money left over after all expenses, such as taxes, have been paid.
The figure is typically listed in the format “earnings per share (EPS).” You can calculate a company’s EPS by dividing its earnings by the number of outstanding shares.
It’s important to note in your earnings article whether a company’s EPS missed analyst estimates, were in line with their estimates, or beat their estimates. This gives investors an idea about whether the company is underperforming or outperforming expectations.
Earnings are important to investors because a company with a profit has money to spend on dividends and investing in its future. If a company is just starting and isn’t yet profitable, it should at least be able to show investors its proposed road to profitability, including a rough timeline.
Revenue, or “the top line,” is the amount of money earned by a company’s normal business operations. You can calculate it by multiplying the price of a company’s product by the amount of units it solid for that period.
With revenue, you want to be sure to tell readers how much the revenue increased year-over-year. It’s important to compare revenue to the same quarter from the previous year because much of business is cyclical. For example, the Christmas quarter for a retail company is most likely going to outperform the other quarters of the year every year. So you wouldn’t want to compare the holiday quarter with the fall quarter of that year. Instead, you want to go back to the previous year’s holiday quarter and find that revenue figure.
And like with earnings, it’s important to let readers know how a company’s revenue stacked up to analyst estimates. A company’s $3 billion quarterly revenue may seem impressive until you realize analysts were expecting it to hit $4 billion in revenue.
3. Free cash flow
Free cash flow is a company’s cash left over after subtracting capital expenditures from its cash from operations. This may sound complex to beginners, but the important thing to know is that investors use it to determine exactly how much money a company has left over to spend on dividends and reinvesting in its business.
A company may seem healthy from its revenue or earnings, but debt often reveals a black spot on a balance sheet if a company is using debt to finance its growth. For example, Netflix appears to be healthy on the surface, but if you look closer, you’ll see that it’s been relying on debt to build its business — and that scares some investors.
While many new companies have to take on debt, there are ways to tell if a company has gone overboard with its debt by calculating its debt-to-equity ratio. You can calculate this figure by dividing the company’s total debt by the value of its outstanding shares. A high debt-to-equity ratio typically indicates a riskier company.
Not all companies have users but, for those that do, it’s a vital part of its quarterly health report. It’s not just social media companies like Facebook and Twitter that track users; payment apps and retail platforms often report users as well.
A company’s users figure helps investors track whether a platform is growing in popularity or fading away. The more users a company has, the more people it can make money off of through future products and services. Without users, many companies have nothing.
Like with revenue and earnings, users is a figure that’s especially important to compare to the previous year. Let investors know how much users grew year-over-year in the same quarter of the previous years vs. the most recent quarter. Investors want to know if year-over-year growth is decelerating or accelerating.
Lastly, it’s a given that you’ll need to tell investors what the company is predicting its next earnings report will look like in four months. Guidance is typically just earnings and revenue. But some companies will add other things, such as expected user growth.
Guidance is important because it tells investors whether a company is anticipating an extra good quarter, a normal quarter, or a bad quarter. This is also beneficial for the company because it can temper expectations if its expecting headwinds over the next period.
That’s why analysts will often change their target estimates after reading a particularly good or bad guidance report from a company.
If you’re a lifetime investor, this should all be review. But if you’ve just read your first earnings report, this may seem overwhelming. Earnings reports are tricky because messing up just one figure can seriously harm your reputation as a reporter, as well as the reputation of your news organization. And while investors should be reviewing quarterly reports themselves, some may be making decisions based off of your reporting.
So just remember to read carefully, check and re-check your numbers, and read as many earnings reports as you can.