Quarterly Results Explained: How Investors Can Read Company Performance

Quarterly results offer investors an idea of how a company has done in the past three months. Companies typically report revenue, expenses, profit, cash flow and a lot more from financial statements to shareholders in order to judge business performance and future prospects. But simply measuring profit but not necessarily the company’s performance might not be enough.

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Investors will have to look for many things which can tell a good company's performance and a bad one.

First, we want to know how the company’s revenue or sales growth is. The latest quarter revenue is then compared to the same quarter of the previous year - year-on-year growth.

If the business is growing or falling, you can also see it in the previous quarter. If you see consistent revenue growth, you are likely to see increased demand for the product or service that the company provides.

Investors then should look at profit after tax (PAT). Higher profit can lead to positive results but we need to understand the reason for the increase. Profit may go up because of better sales or lower costs or a one-time gain. If profits increase mainly because of exceptional income rather than regular business operations, then the improvement may not continue in future quarters.

Operating profit and margins are also important. Operating profit shows how well a company is doing business in its core business. Operating margins can be compared on a quarterly basis to understand how efficiently costs are being handled. Expanding margins can mean that the organization is operating efficiently; declining margins are linked to higher raw material, employee, or other operating costs.

Another important metric is earnings per share (EPS). EPS measures the profit that each share provides for shareholders. An apples to apples comparison of the most recent EPS with earlier ones can be helpful for investors to see that the company is producing more profit for shareholders.

Investors must also look at the balance sheet and debt. A company might have a lot of money if they live well and have a lot of debt. If interest costs rise and borrowings rise, earnings may get hit. Checking cash reserves and debt and the debt-to-equity ratio can give an idea of the company’s financial health.

Cash flow is a key indicator to monitor. A strong accounting profit and operating cash flow can tell if the business is generating real money. When profits rise but operating cash flow is weak for a long period investors may want to ask why.

Finally, investors must read the company’s management commentary and future guidance. Management will talk about expected sales, investments, expansion plans, demand conditions for growth and risks. And sometimes the company’s future guidance can be more important to the stock price than the reported quarterly numbers.

Quarterly results need to be seen as revenue, profitability, margins, EPS, debt, cash flow and management outlook. Investors should compare the numbers with previous quarters, the same period last year and, when possible, industry peers.

One quarter’s robust or weak performance can not be the indicator of long-term performance for a company. A broader view can facilitate investors making better decisions.