Short note
This is a very simplified version and only serves as a brief introduction. I cannot rule out possible errors. The post is also inspired by an episode of the German-language podcast "Doppelgaenger Tech Talk" [1]. For even more (detailed) information, it's definitely worth listening to the episode.
Introduction
To find the quarterly reports of a company, simply search for the company name followed by "Investor Relations" using the relevant search engine. As a rule, you will now land on a special subpage of the company. Then look for terms such as "Financials", "Reports" or "Quarterly Results". Fortunately, there are only two major SaaS providers for investor relations pages. This means that these subpages are generally structured very similarly.
At Alphabet, the parent company of Google $GOOG (-1.89%) the quarterly report can be found directly on the homepage.
In addition to the actual earnings release, there is also a webcast of the earnings call (often as a transcript or video). The earnings slides are a prepared and visually more appealing version of the most important figures and graphics presented in the earnings call. For detailed information, there is also the 10-Q (in the USA), a formal, strictly regulated document that provides a more comprehensive insight into a company's business model, risks and opportunities. However, the focus is now on the earnings release.
Disclaimer
This is not investment advice. These are personal opinions and cannot replace professional advice. If you don't want to miss any more stock analyses and articles from me, please subscribe to my free sub-subscription (link in profile).
Structure of an earnings release
A typical earnings release follows a clear (sometimes predetermined) structure designed to provide investors with the most important information quickly:
The date and quarter are in the title
Selected highlights of the quarterSelected highlights of the quarter: The positive aspects and successes of the company are emphasized here in order to convince investors.
Opening statement by the CEOA personal statement emphasizing the (supposedly) outstanding achievements of the past quarter.
Financial SummaryA summary of the basic financial figures, such as turnover and profit.
Outlook for the next quarterMany companies provide forecasts for the coming period here. If they are missing here, they are often mentioned in the subsequent earnings call.
Legal informationDisclaimer for the outlook and explanations of the metrics used.
CONSOLIDATED STATEMENTS OF INCOMEA detailed overview of the company's earnings position.
Balance Sheet (CONSOLIDATED BALANCE SHEETS)A list of assets and liabilities.
Cash Flow Statement (CONSOLIDATED STATEMENTS OF CASH FLOWS)This is where non-cash transactions such as depreciation and amortization or stock compensation are adjusted to show the actual cash flow.
The income statement using Alphabet as an example [2]
The income statement shows how profitable a company is. The cost structure is disclosed. The current figures are always compared with the figures from the same period in the previous year in order to exclude seasonal effects. It is exciting when a company can increase sales faster than costs. This is known as operating leverage.
- Turnover (Revenues, Sales)Indicates how much money the company has earned through the sale of goods or services.
- Cost of revenueDirect costs incurred to generate revenue, e.g. electricity costs for servers.
- Research and development costsMany companies set themselves the goal of spending a double-digit percentage of turnover on this in order to convince investors of the company's innovation efforts.
- Advertising expenses (Sales and Marketing)Costs for marketing activities, e.g. a marketing campaign for a new Google Pixel.
- General and administrative costsAll other costs, e.g. for financial accounting or rental expenses for the office.
- Total costs and expensesSum of all costs mentioned above
- Income from operationsDeduction of all the above-mentioned costs from turnover. The operating margin can then be calculated from the operating result
- Profit (Net Income)The result after adding further income, such as interest income.
- Earnings per share (EPS)Serves to calculate the P/E ratio and the valuation of a share. The profit is divided by the number of shares. However, there are two types:
- Basic EPSEarnings divided by the current number of shares outstanding.
- Diluted EPSProfit divided by the number of outstanding shares plus any share options not (yet) redeemed
- Number of outstanding shares: Also divided into basic and diluted.
Important questions
-How fast did sales grow? Has sales growth slowed down?
-Has profit increased in line with sales? If not, why?
-Does most of the actual profit come from operating profit or is interest income etc. mainly responsible for the profit?
-Will existing shareholders be diluted by the issue of new shares?
-Which is the largest cost item and can it be reduced through economies of scale?
-Does the gross margin indicate pricing power and future profitability?
The balance sheet
The balance sheet lists the assets and liabilities of a company. It is divided into current and non-current items and is compared with the closing balance sheet of the previous fiscal year.
- EquityCalculated from Total assets minus total liabilities.
- The balance sheet is crucial to financial health of a company and thus to assess the risk of bankruptcy.
Important questions
-How much cash and cash equivalents does the company have?
-How high are the long-term financial liabilities?
-Is there a healthy balance between equity and borrowed capital?
-How is the inventory developing? Are there any indications of sales problems?
-Is the company in a position to pay short-term liabilities?
The cash flow statement
The cash flow statement provides information on the actual financial strength of a company and looks at the course of the current financial year to date.
- Operating cash flow:
- Based on the profit (net income).
- Adjustment for non-cash costs such as share share-based payments and depreciation and amortizationwhich often make up the largest part.
- Investing activities:
- Comprise capital expenditure (CAPEX)such as the purchase of GPUs or servers.
- Including purchases of marketable securities.
- Financing activities:
- Cash-effective transactions such as share buyback programs, interest payments and debt repayment listed below.
- Net change in cash and cash equivalents: Calculated from: Operating cash flow - investing activities - financing activities
Important questions
-Is the operating cash flow positive and how does it relate to profit?
-Is the company paying off debt?
-How are capital expenditures developing?
Sources
[1] https://www.doppelgaenger.io/deep-dive-earnings-report-verstehen-am-beispiel-von-palantir-417/