In the long term, a company's financial situation and its earnings growth determine the movement of its stock. If the company shows consistent earnings growth and sustainable financial health over time, its stock will respond positively. This happens because more investors will be interested in acquiring the company's shares.

To understand these factors, it is important to pay attention to the companies' earnings reports. All companies listed on the U.S. Stock Exchange must publish quarterly and annual earnings reports to maintain transparency with shareholders. In this Hapi article, we discuss the components of earnings reports, key points, and how to analyze them.

What are earnings reports?

Among many other requirements, if a company wants to be listed on the U.S. Stock Exchange, it must publish its audited quarterly earnings reports (reviewed by a prestigious audit firm under a regulation from the Securities and Exchange Commission (SEC). This provides current and future investors with deep insight into the company's financial and competitive direction.

Essentially, the earnings reports include the following Financial Statements: the Balance Sheet (BS), the Income Statement (IS), and the Cash Flow Statement. Additionally, it includes comments and guidance on management's perspective on the business's direction.

What are the types of earnings reports?

Each year, companies listed on the U.S. Stock Exchange publish mainly four reports a year, of two types:

• 10-K: An annual business review at the close of the fiscal year, usually published two or three months into the following year. It provides the most comprehensive analysis of a company's specific accounts and comments on key strategic metrics.
• 10-Q: Corresponds to the company's performance for the first three quarters of the year. It is more summarized than the 10-K but has a similar structure.

With both reports, it is possible to find the earnings per share (EPS) year by year.

What is and when does the earnings season occur?

The earnings season is a few weeks after the end of a quarter. Each company has different dates for publishing its results, but typically it happens on the following dates:

• April: for the quarter ending in March.
• July: for the quarter ending in June.
• October: for the quarter ending in September.
• January: for the quarter ending in December.

How to find earnings reports?

To find a company's earnings reports, go to the Investor Relations section on the company's corporate website (or search them directly on the SEC, although it's not as user-friendly). In this section, you'll find various useful materials to make well-informed investment decisions.

For example, in addition to the 10-Q and 10-K reports, you will find relevant news at the executive level and presentations for financial media. Let's take three companies as examples and download their annual earnings reports.

First, search for "Apple/ Microsoft/ Alphabet Investor Relations" on Google. Once you access each page, check the 2021 documents and select the 10-K report. Finally, you can download these reports in PDF format:

• Apple: 2021 10-K PDF
• Microsoft: 2021 10-K PDF
• Alphabet (Google): 2021 10-K PDF

What can you find in a company's earnings report?

1. Business: This part provides a general description of a company's main operations. The key is to quickly understand how the company generates revenue.
2. Risk Factors: This section outlines, in order of importance and with transparency, each risk the company is exposed to or problematic factors that could arise in the future.
3. Selected Financial Data: Provides specific financial information over the short and medium term, usually over the last five years. This section includes the following key statistics:
   1. Gross profit: results from subtracting the total sales of a company from its production and sales costs.
   2. Net profit: refers to the earnings after all expenses have been subtracted from revenue.
   3. Earnings per share: this amount, usually expressed in cents, is the value of the earnings per share.
   4. Dividends: the amount of money the company returns to shareholders, expressed as a fixed amount per share. However, not all companies pay dividends.
4. Management’s Discussion and Analysis of Financial Condition and Results of Operations: allows business managers to share their interpretation of the previous year's results and helps build a coherent narrative of how those results were achieved.
5. Financial Statements and Supplementary Data: provides the most complete view of all aspects of the company through its Financial Statements: Balance Sheet (BS), Income Statement (IS), and Cash Flow Statement. Additionally, it includes a letter from the independent auditor certifying the validity of the company’s Financial Statements.

How do earnings reports affect stock performance?

Earnings reports are highly influential on stock performance. In fact, earnings season has historically increased stock volatility.

Stock analysts review quarterly and annual earnings reports to assess whether a company is meeting expectations and growing consistently. If a company’s earnings for the period exceed analysts' expectations, the stock price often rises significantly. If a company misses its expected earnings in a quarter, it can lead to a drop in the stock price. This has a major impact on your investments.

How can earnings reports be used to invest in the Stock Market?

Generally, a company that consistently reports good results will provide good returns to investors. This is based on the business having a positive outlook, managing risks, having attractive numbers and consistent earnings growth, and demonstrating sound decision-making by management.

Analyzing earnings reports can be very useful before selecting a stock and making your investments. Once you've decided on an investment app and conducted proper research, you're ready to invest. You can do so safely and easily with Hapi, an app that allows you to invest in stocks without commissions. Don’t wait any longer—open your account now!