How I Analyze Earnings Reports

Posted on April 24, 2014 | Investor Update

Investor-Update
On Tuesday, I had a triple serving of earnings reports. Two of the stocks I follow for AAII Dividend Investing, Travelers (TRV) and AT&T (T), announced their quarterly results. Skyworks Solutions (SWKS), which I personally own, also released earnings. Compounding matters, the May issue of the AAII Journal was due to the printer. Needless to say, I had quite a bit on my plate.

Fortunately, I’ve learned techniques from years of analyzing earnings releases to streamline the process. It’s not a completely formulaic process since every company has different divisions and statistics. Some even release different documents. AT&T particularly bogs down the process by issuing a press release, two sets of presentation slides and several spreadsheets. Still, there are generalities of what to look for that apply to most companies.

Hone in on Revenue, Earnings per Share and Net Income—The very first thing to do is to determine the rate at which revenues, earnings per share (EPS) and net income have changed. Have they grown or decreased from the same period a year ago? How do the growth rates for each line item compare to the other two? If profits grew faster than sales, the company’s margins widened. If sales grew faster, margins shrank. If EPS grew faster than net income, then EPS was boosted by a reduction in the share count. Depending on how the earnings release is formatted, it can be easier to simply calculate the growth rates yourself.

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