Earnings reports allow current and potential investors to evaluate a company's financial performance. All public companies must follow U.S. Securities and Exchange Commission (SEC) regulations when filing earnings reports – Form 10-Q for quarterly reports and Form 10-K for annual reports. Form 10-Q is submitted following each of the first three fiscal quarters of each year, and Form 10-K after the fourth quarter.

In addition to these filings, companies typically create an earnings press release – a summary of what is included in the 10-Q or 10-K report. While an earnings press release provides investors with a basic snapshot of a company, investors desiring a more comprehensive and candid look at a company's financial situation should review the SEC filings. Knowing what is included in an earnings report, and which metrics to look for, can help investors more accurately evaluate a company's financial health. (For related reading, see How To Decode A Company's Earnings Reports.)

What Is in an Earnings Report?
Earnings report contains financial and other information relevant to a company's financial situation. The report is broken down into two parts as follows:

Part I. Financial Information

  • Item 1. Financial Statements
  • Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
  • Item 3. Quantitative and Qualitative Disclosures About Market Risk
  • Item 4. Controls and Procedures

Part II. Other Information

  • Item 1. Legal Proceedings
  • Item 1A. Risk Factors
  • Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  • Item 3. Defaults Upon Senior Securities
  • Item 4. (Removed and Reserved)
  • Item 5. Other Information
  • Item 6. Exhibits.

Reading the Report
While the entire earnings report has information that is significant to the investor, certain elements are considered to be of particular importance to investors evaluating the financial health of a company in which they are already invested or that is a potential investment.

Earnings refers to the amount of profit that a company generates during a specific period, and is one of the most studied metrics on a company's financial statement. Earnings are an important metric because they indicate the company's profitability.

Revenue is the amount of money that a company receives due to its business activities over a specific period. Revenues that continually increase show positive growth, and earnings typically follow.

Expenses are the costs associated with conducting business, and include employee wages, leases and depreciation. As a company grows, its expenses tend to increase correspondingly, so increasing expenses are not necessarily a bad thing. However, when expenses continually grow, as a percentage, more rapidly than revenues and profits, then there may be a problem.

Earnings per Share (EPS)
Earnings per share is important in determining a share's price. It is the portion of a company's profit assigned to each outstanding share of the company's common stock. The value, calculated as Net Income - Dividends on Preferred Stock ÷ Average Outstanding Shares, acts as a gauge of a company's profitability.

Management Discussion and Analysis
Part I also contains the management's take on the financial health of the company. This can include an overview, a discussion comparing the most recent quarter with year-to-date performance and previous quarters, information regarding risks the company is facing, and forward-looking statements. Many CEOs will provide an assessment of where they see their businesses headed. These appraisals, whether carefully optimistic or openly pessimistic, can have an immediate effect on the stock's price. (For additional reading, see Can Earnings Guidance Accurately Predict The Future?)

Risk Factors
Part II of the earnings report contains Item I: Legal Proceedings, and this is where any outstanding lawsuits are reports. Many lawsuits are settled out of court as nuisance claims, but major ones can have a negative effect on the company. Item IA: Risk Factors details any unusual risk to which the company is vulnerable, such as risks associated with new business activity or a proposed change in corporate structure. Extraordinary events, such as natural disasters, are typically overlooked by analysts, since they are unlikely to happen again.

The Bottom Line
While individual metrics, such as revenue, earnings per share and earnings before interest and tax, are important, comparing current performance to that of the previous period, and that of the same period during previous years, is essential. A company is a work in progress, and its performance over time can be a good indicator of its financial health, its ability to adapt to changing market conditions, the productivity of its management and its prospects for future growth. (To learn more, check out Surprising Earnings Results.)

Related Articles
  1. Stock Analysis

    3 Biotech Blue-Chip Companies to Keep an Eye On (AMGN, BIIB)

    Discover three blue-chip biotech stocks you should keep your eye on in 2016. Despite recent struggles in the industry, these stocks are poised for a comeback.
  2. Economics

    Understanding Cost-Volume Profit Analysis

    Business managers use cost-volume profit analysis to gauge the profitability of their company’s products or services.
  3. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  4. Investing Basics

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  5. Stock Analysis

    Understanding Chipotle's Financials (CMG)

    Learn about Chipotle Mexican Grill and its financial statements, including metrics such as comparable sales, operating margin and returns.
  6. Investing Basics

    How To Decode A Company’s Earnings Reports

    Earnings reports tell investors how a publicly-traded company is performing, but aren’t always easy to decipher.
  7. Economics

    The Basics Of Business Forecasting

    Whether business forecasts pertain to finances, growth, or raw materials, it’s important to remember that a forecast is little more than an informed guess.
  8. Investing Basics

    Analyzing A Bank's Financial Statement

    Investors should analyze a bank’s interest rate risk and credit risk when analyzing its financial statement.
  9. Investing Basics

    Analyze Cash Flow The Easy Way

    Cash flow statements reveal how a company spends its money and where that money comes from.
  10. Term

    What Are Quick Assets?

    A company’s quick assets can be easily converted into cash.
  1. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  4. What are working capital costs?

    Working capital costs (WCC) refer to the costs of maintaining daily operations at an organization. These costs take into ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Who actually declares a dividend?

    It is a company's board of directors who actually declares a dividend. The declaration date is the first of four important ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center