Five things to look for in a financial results report this earnings season

We all dream of investing or trading on the right company just as they make it big or even bigger. And, sometimes, companies give the first hint of these big reveals in their next results presentation.  

But earnings season can come with a lot of noise – in fact, it’s designed to. So, it’s important to know exactly what you’re looking for in order to avoid being whipped up into a mindless frenzy by canny CEOs.

If you’re an investor and/or trader already, you know about fundamental analysis. And treating results reports like an exercise in fundamental analysis, just like reading any other balance sheet, can be helpful.

Here are five things to look for in financial results reports this earnings season:

1. The sustainability of dividends for the company

The standpoint of many investors during earnings season is: ‘show me the money’. But, while getting a nice dividend payout is great, it’s also worth evaluating that dividend as it compares to your personal risk/reward ratio.

Many stocks that give out particularly high payouts are higher-risk too: either less proven and established than peers in their sector or more subject to volatility. For an example, read our recent article on how 2024’s big dividends from big oil companies may belie their uncertain future. 

When looking at a dividend payout as announced in line with earnings, it may be worth doing a dividend yield calculation, to see what percentage of its profits the company pays out as dividends.

Generally, a dividend yield below two percent is considered quite little, with three to five percent being a good amount. Dividend yields above six percent may be unsustainable for the company in future.

2. How revenues and profits stack up to closest competitors and bellwether stocks

We know not to focus on the revenue and EBITDA numbers themselves more than whether or not they’re in line with expectations. But what many investors forget about is the wider context.

Certain companies are known to be bellwether stocks in their industry. If their share price rises or falls based on general market sentiment, chances are that other similar stocks in that same industry will too.

For example, Nvidia has been tied mentally to the future of AI in many investors’ minds for the past couple of years, and their share price has directly reflected the market’s bullish optimism.

It’s worth looking at whether or not your stock is reflecting what bellwether share prices and indices seem to be saying, and whether or not their earnings are broadly in line with how their closest competitors are doing also.

3. Significant plans for the future (that are detailed)

Almost without exception, companies will announce or remind investors of exciting upcoming prospects in their earnings presentations. But not all of these are created equal.

News that in still far into the future and vague on dates and details may or may not have a direct effect on you. On the other hand, news with concrete timelines, budgets and details laid out almost certainly will.

Take McDonald’s ‘accelerating the arches’ strategy, which it announced around the same time as its Q3 2023 earnings and will certainly mention in its Q4 results this month, as a good example.

4. The sustainability of debt for the company

When investing, you’re playing a long game. This means that results in and of themselves are only one half of the equation. The other side is this: are these results and efforts sustainable?

No metric is more important here than profit and debt. A company’s sustainability with regards to its debt is arguably the strongest indicator of a well-functioning machine, as out0of-control debt is often the first sign of mismanagement and future failure.

To this end, it may be worth performing a debt-service coverage ratio calculation, or a debt-to-equity ratio. This will give you an idea of how comfortably a company can afford to repay its debts using its income alone, without needing to dip into any other resources. A debt coverage ratio of around 1.5x or even higher is considered ideal.

5. What these (and other) earnings tell us about the global economy

Last but not least, earnings season as a whole can be a good gauge of market sentiment towards equities as a whole and towards the sector your company falls into. Keeping an eye on any macro headwinds and tailwinds is worth doing, although these big-picture news items shouldn’t be taken in isolation. Ultimately, they’re more of a leading indicator for what may (or may not) appear on the horizon for your chosen stock.