Earnings reports

What the company tells its owners

A share is a piece of a business, so sooner or later its price depends on how the business does. The main way investors find that out is the company’s own report.

In the US, listed companies must publish their results every quarter — every three months — and a fuller report once a year. Each of these is called an earnings report. The company releases its figures, usually just before the market opens or just after it closes, and then its managers often answer analysts’ questions on a call.

Most companies report in the weeks after a quarter ends, so many reports arrive close together. People call these weeks earnings season.

The three numbers people look at first

Revenue. Revenue is the money the company took in from what it sold — every phone, subscription or meal — before any cost is paid. It is sometimes called sales, or the “top line”, because it is the first line of the report.

Net income. Net income is what is left of the revenue after every cost: what the products cost to make, salaries, rent, interest on debt and taxes. It is the company’s profit — the “bottom line”. A company can have very large revenue and little or no net income if its costs are almost as large. When costs are larger, net income is negative: a loss.

EPS. Earnings per share divides net income by the number of shares. It answers a shareholder’s question: how much profit did my one share earn? Because it is per share, it also changes if the company issues more shares or buys some back, even when the profit stays the same.

The figure below keeps revenue fixed and lets you change the costs. Watch how the profit — and the profit as a share of revenue, the margin — responds.

Expectations: the estimate and the guidance

Before a report, analysts at banks and research firms each publish what they expect the company to earn. The average of their estimates is the consensus estimate, for revenue and for EPS.

When results come out, the first comparison is with that estimate:

• Results above the consensus are a beat.
• Results below it are a miss.

In the example above, if the consensus for EPS was $1.90, the company’s $2.00 beat it by $0.10.

Many companies also give guidance: their own forecast for the next quarter or the year — for example, “we expect revenue of $2.0 to $2.1 billion next quarter”. Guidance is about the future, so investors often care about it as much as the results themselves.

Why a share can fall on good results

A share’s price already reflects what people expect the company to earn. A report moves the price only by how much it changes those expectations.

So a company can report record profit and its share can fall:

• The results beat the consensus, but some investors had hoped for even more.
• The quarter was good, but guidance was weaker than expected. If the company above guides to $2.0–2.1 billion of revenue and analysts expected $2.3 billion, the outlook has worsened, whatever the past quarter showed.
• Revenue was fine, but costs grew faster, and the margin shrank.

And the opposite happens too: a company reports a loss, but a smaller one than feared, and its share rises.

Reading a report without getting lost

You do not need to read every page. For a first look, check:

1. Revenue — did it grow compared with the same quarter a year ago?
2. Net income and EPS — did profit grow too, or did costs eat the growth?
3. The consensus — did the company beat or miss?
4. Guidance — did the company raise, keep or lower its forecast?

Comparing with the same quarter a year earlier matters because many businesses are seasonal: a shop’s last quarter of the year, with the holidays, is often its biggest. The Research path goes further, into the three full financial statements and what a price says about profit.

In short

Every quarter a US company reports what it sold (revenue), what it kept after all costs (net income), and what that is per share (EPS). The market compares those numbers with the analysts’ consensus and the company’s own guidance. Prices move on the surprise, not the result — which is why a share can fall on good news.