Fundamental analysis vs technical analysis, which is more effective? Fundamental analysis requires analyzing Balance sheets, income statements & more.
Technical analysis is about reading the charts. This article goes into the basics of Fundamental analysis.
Learning about a company you have invested in is part of doing your due diligence as an investor. One way to do this is to examine the firm’s quarterly earnings reports. These reports are kind of like a report card that shows how well the company is doing financially.
At first glance, these reports might seem intimidating, but you don’t have to be a financial expert to know what to look for during your examination. Let’s break down what’s included in an earnings report and how to read one.
What is an Earnings Report?
An earnings report is a document that publicly traded companies are required to provide to investors. In Canada, these are found within the System for Electronic Document Analysis and Retrieval (SEDAR). In the United States, the equivalent is hosted by the SEC’s Electronic Data Gathering, Analysis, and Retrieval Database (EDGAR). EDGAR contains different types of filings, including 10-Q (quarterly) and 10-K (annual) reports, while SEDAR uses the Annual Information Form. Both databases host additional information, such as required disclosures and announcements.
Now that you understand what an earnings report is, let’s look at how to decipher this critical information.
What to Look for in an Earnings Report (Plus, a Vocab Lesson)
It’s not uncommon for earnings reports to be upwards of 100 pages, so knowing what you’re looking for will save you a lot of time and squinting. Most investors are concerned with income statements, balance sheets, and statements of cash flow. You may also find the management discussion interesting.
Here are definitions for each of those highlights:
- Income statement (or statement of earnings) - A company’s income statement considers the company’s revenue and expenses during the stated time period. It may report the firm’s net income, that is, the total revenue and gains after subtracting total expenses. Income statements are valuable means of learning more about a company’s operations and how efficiently it is being run.
- Balance sheet - A balance sheet reports a company’s assets, liabilities and shareholder equity. Balance sheets help investors calculate their rate of return because they provide visibility into how much a company owns and owes and how much shareholders have invested in the company.
- Statement of cash flow - A statement of cash flow shows how much cash (and cash equivalents) is being transferred into and out of the company. These statements of cash flow are considered in the statement of earnings because they help determine how much free cash the business has available. Cash received might be labeled as “inflows,” while cash spent might be labeled as “outflows.” The three main categories of cash flow are operations, investing and financing.
- Management discussion and analysis (MD&A) - The management discussion and analysis section is where the company’s management presents an analysis of the company’s performance.
Many more sections in a company’s earnings report aren’t listed here, but the average investor doesn’t have time to read through 100+ pages of financial jargon. Instead, examine these key sections and ask yourself questions such as:
- How does this report compare to the last one? Is the company financially healthy?
- Have there been any important acquisitions or sales that investors should know about?
- How does this quarter’s performance compare to the same quarter last year?
- Are there any financial risk factors to consider?
The numbers in an earnings report are important, but your analysis and judgment are more important. If you have questions about a company you’re invested in, or their quarterly or annual earnings reports, ask your financial advisor for more information.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.