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How to Read and Understand Quarterly Reports

15 December 2021
6 minutes

The quarterly reports and financial statements are early indicators that show the quarterly progress of the business operations. As per SEBI (Securities and Exchange Board of India) guidelines, it is mandatory for every listed company to publish quarterly reports to safeguard the interests of the investors.

Thus, quarterly reports help investors assess the performance of the company. It also helps and make informed investment decisions.

However, there are multiple aspects to understanding the quarterly reports. Here are a few important things to look at while understanding quarterly reports. And a step by step guide for financial statements.

Gross Sales

This is the “top-line” or the turnover of the company. It is the measure of the total revenue or sales. A consistent rise in the top line is an indicator of growing demand and good business health. Ad hoc sales of fixed assets or one fly-by-night operator demand do not give consistency in the top line. 

Please note:  Gross Sales of a particular year cannot be considered on its own.  The gross sales are taken into comparison with the previous period. It is also taken for over a few years to see the trend.

Net Sales

Net Sales = Gross Sales – Discounts/Returns/Allowances

This is a better measure to understand real business health than Gross Sales. But to calculate the same, one needs all the details including sales discounts, returns and the allowances offered.

Operating Income

The income of a company comprises both operating and non-operating income. Operating income is from selling the company’s products or services. It is the measure of the profit generated from operating the business. This is after deduction of salaries, depreciation of goods and another fixed cost. It is a measure of the profitability of the business.

On the other hand, non-operating income is other-than-business income. It includes revenues from dividends, rental income, interest, among others. 

A consistent decrease in operating income could mean a declining market share or reduced demand for the company’s product or services.

Operating Profit

Operating Profit = Net Sales – Operating Expenses

Wherein operating expenses is the cost of running the business-like

  • Salaries
  • Utility bills like electricity, rent, etc.
  • Office expenses like stationery, license cost, etc.
  • Cost for research and development
  • Legal and bank charges, etc.

Apart from the above, other fixed and variable costs, part of the operating expenses, has to be deducted from net sales. This is to arrive at the operating profit of the business, known as EBITDA. It stands for earnings before interest, tax, depreciation and amortisation. 

Higher the Operating Profit, healthier is the business. The Operating Profitability shows the ongoing business conditions as well as the efficiency of the management. Operating profit is one of the important factors considered in a financial analysis guide.

Margins

Margins help determine the financial safety of a company. The growth in a profit should not be at the cost of margins. Margin is the business’ “safety net”.

If there is a decrease in the EBIT margin of the company, then it is an indication that the company is taking a hit on profitability to increase its revenues. Alternatively, it could also be due to higher operational costs. 

Interest cost

Interest cost is the interest on the loans outstanding, by the companies. Thus, an increase in the interest cost means an increase in the debt of the company. However, debt is healthy for the financial wellness of the business as long as there is a proper deployment of the same. This should be accompanied with steady growth in sales and profitability. Otherwise, the rising interest would eat up the business margins.

If the increase in debt doesn’t reflect in sales or profit growth, then it will lower the overall returns for the investors. 

Net Profit

It is also called as ‘bottomline’. It shows the company’s net profit or loss for that period.

Net Profit = Operating Profit – Tax – Loan Repayment

 It is of most relevance to understanding the financial health of the company and is often one of the most sought after factors in financial statements. Higher the net profit, higher is the company’s profitability.

EPS (Earnings per share)

EPS formula is by dividing net profit by a total number of outstanding shares. The EPS value is used to calculate the P/E ratio of a share.  It is actually the amount of money paid for 1 share for the amount of money earned by the company for that share.

EPS, a widely used indicator in the industry, shows the company’s financial status. Thus, calculating the EPS correctly is of extreme importance.

Earnings per share (EPS)= Net Profit / Total number of shares traded

Note: For an investor, it is important to see how the EPS is improving. A higher EPS indicates better performance of the company, resulting in higher earnings for investors. 

When Do Companies Announce Quarterly Results?

Quarterly results and earnings call happen every quarter. 

A listed company needs to adhere to Securities & Exchange Board of India (SEBI) regulations. All listed companies need to:

  1. File compliance for financial results every quarter.
  2. Send a consolidated financial report if it has subsidiaries or associate companies 
  3. The time window for this filing is 45 days from the quarter-end. 
  4. In the case of an annual financial result, the time window is within 60 days from the current fiscal year-end.

Where Are The Results Available?

BSE and NSE: All listed companies have to upload a copy of their results on the websites of the exchanges they are listed on. 

Company Websites: Many corporates also share the QREC related details on their websites in the investor relations section. A few of them also put all the conference call transcripts/recordings as well. These are gold mines for any curious investor.

These are not an exhaustive list of sources.

How Can An Investor Gain From Results?

Quarterly results provide background information and context that help explain the performance numbers of the company for the observed quarter. It helps the investor gain perspective and underlying reasons for possible deviations from expected performance or achievements. It also helps investors understand the current attitude of the management.  And the immediate plans that it has to sustain any over-performance or recovering from any under-performance in the coming quarters. 

Having a repository of several earnings calls of a company can help you form a more balanced view. And avoid any irrational optimism or pessimism based on recent results. 

Conclusion

This was just a step by step guide for financial statements and to understanding various concepts. Understanding quarterly results is only one of several parts of the investment process. While it is important, it is not the be-all and end-all. One bad quarter may not mean you should sell the stock. Likewise, one great quarter often should not be the only signal for you to buy. 

There are other qualitative measures that needs to be taken into account for a buy/sell decisions. 

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Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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