Earnings Announcement
Earnings announcements are formal statements made by publicly traded companies to communicate their financial performance to the public.
What is an Earnings Announcement?
Do you want to invest in the stock market? Do you follow companies and wait for their announcements eagerly? Earnings announcements are formal statements made by publicly traded companies to communicate their financial performance to the public.
These announcements include crucial information about the company's revenues, expenses, profits, and losses. The announcement aims to provide investors and analysts with the company's financial health snapshot.
The companies are legally obligated to report their financial results quarterly, and their announcement of earnings usually coincides with these quarterly reports.
However, some companies may also release these announcements outside of these quarterly reports. This could be in the form of interim updates, such as when a company experiences a significant event or a change in its financial outlook.
These announcements are highly awaited by investors, analysts, and other stakeholders in the financial markets. They can also impact a company's stock price as investors and traders react to the news contained in the announcement.
Positive reports can increase the company's stock price, while negative reports can cause a decline in the stock price.
Companies with a history of meeting or exceeding market expectations may have built a rapport of confidence with investors, and this may mitigate the price surge the company may see in the hours following the positive announcement.
The history of a company's performance can mitigate the action the market experiences in the hours following an announcement of earnings.
Earnings announcements significantly impact stock prices, and investors pay close attention to the details the companies convey while making investment decisions.
Understanding Earnings Announcements
Earnings announcements are formal statements released by publicly traded companies to communicate their financial performance to the public.
Publicly traded companies are required by law to report their financial results on a quarterly basis, and their announcement of earnings usually coincides with these quarterly reports.
In the United States, for example, most companies typically release their earnings reports during the weeks following the end of each quarter. These quarters end on March 31, June 30, September 30, and December 31.
These announcements provide a snapshot of a company's financial health and are eagerly awaited by investors, analysts, and other stakeholders in the financial markets.
However, some companies may also release these announcements outside of these quarterly reports. This could be in the form of interim updates, such as when a company experiences a significant event or a change in its financial outlook.
For example, a company may issue a report to update investors on its financial performance after a merger or acquisition.
Note
The announcement includes information about the company's revenues, expenses, profits, and losses, as well as other key financial metrics that investors and analysts use to evaluate a company's financial health.
Companies may announce their earnings in various ways. Companies typically host press conferences through news outlets like:
Companies may also hold conference calls or webcasts to discuss their earnings reports with analysts and investors. These calls are often recorded and made available online for anyone to access.
These reports can also impact a company's stock price as investors and traders react to the news contained in the announcement.
- Positive reports can increase the company’s stock price
- Negative reports can cause a decline in the stock price.
Moreover, these reports are an important tool for management to communicate with shareholders and other stakeholders.
They provide an opportunity for management to showcase the company's performance, highlight key accomplishments, and set expectations for future performance.
Earnings Announcements and Stock Prices
Company announcements of earnings almost instantly impact the price of their shares. Depending on whether the announcement news is positive or negative, the market takes in that information, and the price of stocks for that company adjusts accordingly.
When a company announces earnings that exceed market expectations, the stock price typically increases.
This is because investors view the company as performing better than anticipated, often leading to increased demand for shares. This increased demand can increase the price of the stock.
Conversely, the stock price decreases when a company announces earnings that fall short of market expectations.
This is because investors view the company as underperforming, often leading to decreased demand for shares. A decline in demand for the stock can cause its price to decline.
The history of a company's performance can mitigate the action the market experiences in the hours following an announcement of earnings.
Companies with a history of meeting or exceeding market expectations may have built a rapport of confidence with investors. This may mitigate the price surge the company may see in the hours following the positive announcement.
Companies with a history of falling short of market expectations may mitigate the impact of their negative announcement.
Note
These announcements of earnings can also impact the broader market. Most companies' fiscal quarters end roughly around the same time, so the stock market tends to see increased volatility and market-wide movements.
Let's say a company in a particular industry reports earnings that beat investors' expectations and see their stock price increase. Likewise, similar companies in that industry may see stock price increases as investors see the industry as a whole performing well.
Investors pay close attention to the details the companies convey when making investment decisions because these announcements significantly impact stock prices.
Key Metrics of Earnings Announcements
Many financial metrics are good indicators of what you should do with the shares of a company when they announce their earnings. You should look for the following metrics:
1) Revenue growth
This is a good indicator of the health & success a company has. Additionally, investors & analysts should look for consistent growth in a company's revenue as this tells you that its management & products can generate more revenue and scale their business.
Revenue growth = (Final Value - Initial Value) / Initial Value
2) Earnings per share (EPS)
This tells investors the profit that can be attributed to one share of the company. Therefore, a higher EPS generally indicates that a company is performing well and generating more profits.
Earnings per share (EPS) = Net Income / # of Outstanding Shares
3) Gross profit margin
Investors use this ratio to know how much profit each product makes after accounting for the cost of making the product.
A higher gross profit margin typically means the company operates efficiently and generates more profits per product.
Gross profit margin = (Revenue - GOCS) / Revenue
These are Selling, General, & Administrative (SG&A) expenses the company may have while operating its business. This can include salaries, rent, and marketing expenses.
Investors & Analysts should keep an eye on the operating expenses of a company and ensure they are not risking higher than revenue.
This can be done using the same formula for calculating revenue growth and comparing the two numbers.
Note
The company is at risk of being unprofitable if the OE for a company is growing faster than revenue.
This ratio tells investors how much profit a company makes after paying its operating expenses.
Operating Profit Margin = Operating Income / Revenue
6) Cash flow
To get an idea of how well a company handles its cash, you should calculate the free cash flow for the firm. This value should be positive. Positive cash flows mean the company has cash to pay off debt or invest in new projects.
Cash flow = Free Cash Flow = Operating Cash Flow - Capital Expenditures
7) Return on investment (ROI)
This measures a company's profit relative to their investment. A company with a large ROI generates large returns for its investors. It also implies the company is making efficient use of its resources.
Return on investment (ROI) = Net Income / Invested Capital
Watching for these metrics during the announcement of earnings for a company can help you make better decisions on whether to buy, hold, or sell a company's stock.
You can better calculate these metrics by taking the Wall Street Oasis’s Financial Statement Modeling Course!
Earnings Announcements Case Studies
Let's look at how the earnings announcements of some popular companies impacted their share price.
1) Amazon.com
Amazon's 2017 Q2 announcement of earnings reported revenues of $38 billion. This was a huge miss compared to the expectations of investors. Additionally, Amazon's EPS of $0.40 was also lower than what investors & analysts forecasted.
In the after-hours trading that followed the announcement, the stock price of Amazon dropped 3%.
2) Facebook (Meta)
Facebook's 2018 Q2 announcement of earnings reported a revenue miss and revealed slow user growth. In the after-hours trading following the announcement, Facebook's share price dropped over 20%.
Investors became concerned about the company's ability to grow their user base and generate ad revenue.
3) Apple
Apple's 2019 Q1 announcement of earnings reported sales records for their Macs, wearables, and services. They had earned $84.3 billion for the quarter. Apple had also set an EPS record of $4.18. The following day Apple's stock jumped 6.8%.
4) Tesla
Tesla's 2021 Q1 announcement of earnings reported a profit of $438 million. This met analysts' estimates. Investors were impressed by Tesla's ability to generate profits despite supply chain & production issues.
However, the stock price later experienced volatility as investors raised concerns about Tesla's future growth prospects.
These are real-world examples of how company announcements of earnings can impact the company's stock price. As a result, investors and analysts watch the information relayed during this announcement to make investing decisions.
Summary
Earnings announcements are formal announcements released every fiscal quarter by publicly traded companies. These announcements communicate the company's financial performance to the public, analysts, and investors.
These reports contain critical information about the performance of a company. They convey information about various values found in the company's financial statements like
- Revenue
- Expenses
- Profits
- Losses, and more important values
Investors & Financial analysts use this information to evaluate the company's financial health and make investment decisions based on this information.
These reports correlate with the direction of the company's stock price. For example, if a company reports positive earnings & metrics, the stock price will jump up, while a negative earnings announcement can cause a decline in stock price.
Analysts & Investors use financial statements to calculate many financial ratios.
Investors & Analysts also pay close attention to comments from management in the management discussion & analysis (MD&A) section of the released financial statements.
Note
Investors & Analysts carefully analyze these statements & any press conferences that come with these announcements to make informed investment decisions and adjust their investment strategies as needed.
This section gives the company's management a chance to explain their performance and some insight into what to expect for the future.
The company's management will explain any recent developments in the company's industry, changes in market conditions, or plans for future growth and expansion.
Earnings Announcement FAQs
They are statements made by publicly-traded companies announcing their financial performance for a certain time period. This is normally done by quarter and announces metrics like profitability.
They are done at the end of each company's fiscal quarter. The dates & times will vary from company to company. Analysts & investors watch for these earnings reports because of their impact on the stock price.
Investors & Analysts will compare metrics like the company's revenue, earnings per share, profit margin, and future outlook with past years to evaluate the company's performance. So naturally, positive announcements increase the stock price, and vice versa.
They do their due diligence by reviewing past financial reports, analyst ratings, and industry trends. Some investors may choose to buy or sell a company's stock before an announcement to avoid the volatility that occurs after the fact.
This is when the earnings reports drastically differ from what analysts & investors were expecting. Conversely, if the reports are positive (i.e., higher earnings than expected), the stock price would increase, and vice versa.
Yes, they can, especially if the company has a large market share and is well known. Positive earnings for a company like that can boost the entire market, while negative reports can cause a marketwide sell-off of shares.
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