Earnings reports are oftentimes the only way you can look inside a company.

3 Ways an Earnings Report Can Tell a Company’s Story

Here’s the dull part of earnings reports: All publicly traded companies are required by the U.S. Securities and Exchange Commission to provide them quarterly. Here’s the exciting part for advanced traders and true do-it-yourself investors: At their heart, earnings reports tell stories that can provide crucial insights. You just have to know where to look.

We’ll offer a broad overview of an earnings report and highlight a few numbers that can affect the company and the stock price.

Income Statement: The Story of the Recent Past

The income statement tells you the revenues generated and profit (or net income and earnings per share) earned in the previous quarter. But if you focus only on the top line (revenue) and the bottom line (profit), you might miss some important numbers in the middle, including expenses.

Because an income statement looks at how a company performed in the past, it doesn’t necessarily tell you what a company might do in the future. That’s why some investors compare numbers over multiple quarters to see if they can spot trends. Are certain expenses growing much faster than others? Are revenues slowing for certain lines of business? Is earnings per share slowing down?

Some companies offer guidance, or projections, of future revenue and profit that investors might want to consider. In some cases, an uncertain outlook can detract from a good quarter and the stock price will fall, and at other times strong guidance can provide a silver lining to a weak earnings report.

Cash Flow: The Story of Liquidity

The cash flow statement routinely gets ignored by traders and investors who focus on the income statement and balance sheet. But cash flows can act as an early warning gauge. Before a company’s balance sheet starts looking out of whack, oftentimes cash gets used up.

If cash is rising steadily, that’s normally a good sign that a company will be able to meet its financial obligations. If cash is falling, then it might be time to ask questions.

Balance Sheet: The Story of a Company’s Health

The balance sheet is where you’ll find the level of assets and liabilities held by a company. You can see how much long-term debt it has, the value of its assets (like buildings or equipment) and how much it must pay out in short-term liabilities.

The Complete Company Story

Earnings reports are often the only way you can look inside a company. Fortunately, you might be able to elicit a pretty powerful story by reviewing the big three components outlined above. In addition, many reports offer other crucial details that might be worth your attention, such as the amount of institutional and insider ownership of company stock, information about the company’s customer base, or details on an acquisition of another company or sale of a division.

It can seem daunting going over an earnings statement, especially for large companies with multiple lines of business. But digging into the numbers can help you determine whether a company’s tale is one that you want to continue to follow.

Question: Which parts of an earnings statement do you find most crucial?

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