Every three months, or quarters, public companies are required to report their finances to investors. Earnings reports include critical information that can drastically affect a company’s value. You can find earnings reports on the company’s “Investor Relations” page or newsroom page.
Investors can find three key documents in an earnings report: the Income Statement, the Balance Sheet, and the Cash Flow Statement. The Income Statement shows the company’s revenue, expenses, and profit (or loss). The Balance Sheet shows the company’s assets and liabilities and the Cash Flow statement shows the company’s cash inflows and outflows.
Prior to an earnings report, investment analysts will provide estimates for the company’s revenues and profits for a particular period. If a company beats analyst estimates for revenue and profit, the stock price will generally go up short-term on the news. If a company misses analyst estimates for revenue and profit, the stock price will generally go down short-term on the news. It is also common for a company to beat on one metric and miss on another.
Let’s look at Netflix’s Q2 2020 earnings. The subscription entertainment company reported earnings per share (EPS) of $1.59, but analysts were expecting them to report EPS of $1.89. However, on the revenue side the company reported $6.15 billion, better than the $6.08 billion expected by analysts.
Shortly after Netflix reported their earnings, the stock dropped 10% on the news because profit missed expectations.
Another key aspect of earnings reports are forward-looking guidance, which is management’s view on the next quarter’s earnings. If the company’s management provides strong guidance, it is a sign of confidence and may result in the stock trending upward. Conversely, if the company’s management provides weak guidance it may result in the stock trending downward.
If you are long-term investor, the quarter-to quarter or short-term performance of a company shouldn’t bother you. As long as the company’s long-term view is positive, that is the only thing that should matter.