An introduction to reporting season for investors

As a company’s share price is largely a measure of market expectations, the results of an earnings report could drastically change the sentiment around a company. Reporting seasons are often marked by high levels of volatility and investor activity as some companies over-perform while others under-perform. These fluctuations provide opportunities and risks for traders and investors, but it is important to know how to use the information in earnings reports in order to capitalise on any movements.

As always, it’s important to do your research. In the lead up to reporting season, make sure to get your hands on some analyst reports on companies you are interested in.

These should include not only the thoughts of the individual analyst but also information around the “consensus” expectations of those at other firms. Armed with this information, you may decide that company x is undervalued or overvalued and decide to take a position in the lead up to the reporting date. Alternatively, you may decide to wait for the company’s results to be released and place a position after seeing whether it fell short of expectations or beat them.

Also, be aware of a market trend known as “buy the rumour, sell the fact,” which is when a company’s share price rises in anticipation of a strong result (or falls in anticipation of a weak one), then falls on the day the result is released as traders lock in profits. This can be a rewarding strategy (though not without risks) but also creates a potential buying opportunity on the day of the release.

The first thing most investors will look for is information about a company’s earnings. Depending on the business, this may be reported as EBIT (earnings before interest and tax), EBITDA (earnings before interest, tax, depreciation and amortisation) or something similar. Market watchers typically prefer these measures to net profit because they tend to provide a clearer and more consistent view of the performance of the company’s operations.   

A company’s sales or revenue figures are also a core measure of performance. This is especially the case for smaller, fast-growing companies that are focused on quickly growing sales, rather than earnings in the short to medium term.

On a more technical level, many investors will examine a company’s cash flow. A company with a positive cash flow means they have enough liquid assets to cover their financial obligations. The higher a company’s free cash flow, the greater its ability to pay down debt, pay dividends and invest in the business, which may help underpin its longer-term performance.

Companies can employ a range of tactics to cloak the poor results contained in their earnings reports, and it pays to be on the lookout for hidden red flags. While they are required to release all relevant information, some companies may look to bury the bad news by using ambiguous language. Terms like ‘challenges’ and ‘pressure’ may be far more telling than they appear to be on paper and investors should look a little deeper if they come across them. In other cases, a company may just choose to highlight the positive information and bury the negatives in the text, so it pays to read well beyond the headline during reporting season. 

Earnings reports are an investor’s best friend and provide the key information you need about a company’s performance. Reporting season brings great opportunities for traders and investors who are looking to take advantage of market fluctuations. But even if you aren’t looking to actively trade during this reporting season, it provides an important opportunity to build up your investor knowledge and confidence to ensure you’ll be well placed to act on any future opportunities.