How to read an earnings report: a beginner's guide

To read an earnings report, start with four things: revenue, earnings per share (EPS), how both compare to analyst estimates, and the company's guidance for what comes next. Then check margins and cash flow, and skim the earnings call for anything that changes the story. You don't need to read every page. You need to know what changed and whether it matters for why you own the stock.

Here's how to do that in about 15 minutes.

What is an earnings report?

Public companies report their financial results every quarter. In the US and Canada, that usually means four reports a year, with the fourth quarter often combined with the annual report. A typical earnings release includes:

• A press release with headline numbers and comments from management.
• Financial statements: income statement, balance sheet and cash flow statement.
• Often, a slide presentation.
• An earnings call, where executives present and answer analysts' questions.

The official versions are filed with regulators. US filings are on SEC EDGAR. Canadian filings are on SEDAR+. Most companies also post everything on the investor relations section of their website.

Step 1: Revenue

Revenue, sometimes called sales or the top line, is the money coming in from customers before costs. Look at:

• Growth versus the same quarter last year. Comparing to the same quarter avoids seasonal effects, like holiday shopping.
• Growth by segment or region, if the company reports it. A company can grow overall while its most important business slows.

Step 2: Earnings per share (EPS)

Earnings are profit after costs. EPS is that profit divided by the number of shares, so you can compare periods even if the company issued or bought back shares.

You'll often see two versions:

Adjusted numbers aren't wrong, but they're chosen by the company. If the adjustments are large or show up every quarter, be sceptical. Companies must show how they get from one number to the other.

Step 3: Compare to estimates

Before each report, analysts publish estimates for revenue and EPS. The average is called the consensus. When results come in above it, that's a beat. Below, a miss.

The difference, often shown as a percentage, is the surprise.

A beat is not the same as good news for the stock. The price before the report already reflects what investors expect, which is sometimes higher than the published consensus. That's why stocks sometimes drop after beating. We explain this in Why did my stock drop on good earnings?

Step 4: Guidance

Guidance is the company's own forecast, often for revenue or EPS over the next quarter or full year. Not every company gives it.

Guidance frequently matters more than the results you're reading. The quarter that just ended is history. Guidance is management's view of the future. Look for:

• Raised, maintained or lowered? A change in either direction is usually the headline.
• Compared to estimates. Guidance below what analysts expected can outweigh a strong quarter.
• The reasons given. "Softer demand" and "a one-time delay" lead to very different conclusions.

Step 5: Margins and cash flow

Two more checks separate a good quarter from a lucky one.

• Margins. Gross margin and operating margin show how much of each dollar of revenue the company keeps. Revenue growing while margins shrink can mean the company is buying growth with discounts or higher costs.
• Cash flow. Profit on paper and cash in the bank aren't the same. Operating cash flow and free cash flow show whether the business actually generates cash.

Step 6: The call and the tone

The earnings call is where management explains the numbers and answers questions. You don't have to listen to all of it. Read a summary, or ask an assistant to summarise the transcript if you have one, and look for:

• What management chose to emphasise.
• The questions analysts asked more than once. Repeated questions usually point to the market's worry.
• Anything about demand, pricing, costs, competition or big investments.

A 15-minute checklist

1. Revenue: growth year over year, and by segment if available.
2. EPS: GAAP and adjusted, and how big the gap is.
3. Estimates: beat, miss or in line, on both revenue and EPS.
4. Guidance: raised, maintained or lowered, and why.
5. Margins: expanding or shrinking.
6. Cash flow: is profit turning into cash?
7. Your thesis: does anything here change why you own it?

The last question is the one that matters. If you wrote down a reason for owning the stock, check the report against it. If nothing in the report touches that reason, a big price move may just be noise.

Using AI to read earnings

An AI assistant is a good reading partner for earnings, as long as it has real data and you ask the right way. With web search on and a connector that has your holdings, you can ask:

• "Which of my holdings report earnings in the next two weeks?"
• "Walk me through the last earnings report for this company. Beat or miss on revenue and EPS, and what did guidance say?"
• "Explain EPS using this company's latest results as the example."
• "What's the bull reading and the bear reading of this report? Cite sources and dates."

Bywell provides earnings history and upcoming dates for what you own, and can remind you before a report. More on that in How to get earnings reminders for the stocks you own. For anything important, check the numbers against the company's own release.

This is general information, not investment advice.

Keep practising

Reading earnings gets much faster with repetition. Pick one company you own and read its next report with this checklist. By the third or fourth quarter, you'll know which lines to look at first.

If you'd like reminders before your holdings report and help reading the results, start with Bywell.