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How To Read Earnings Reports: A Simple 3-Step Framework
Embrace Earnings Season With Confidence
Quarterly earnings reports can be overwhelming: 🤯
Don’t know, where to start?
Looking at stock prices, rather than fundamentals?
Doing too much and still, you’re constantly feeling behind?
Here’s my simple 3-Step Framework to navigate earnings season with ease.
Step 1: Fundamentals – Get a grip on the data
The easiest (and most reliable) data source is the investor relations (IR) page of a business. Why? Publicly traded companies need to quarterly report their results. Simply look for “Cloudflare IR”, for instance.
In the IR section, you’ll find the data in one or several of these resources:
There are a gazillion metrics to track.
Unless you’re a professional or like to spend hours or days on each earnings report, a few selected metrics suffice to evaluate the health of a business.
5 Metrics to get you started
Revenue & Revenue Guidance
Earnings per Share (EPS)
How to track metrics
No need for fancy tools. A simple spreadsheet will do.
However, there is some upfront work: One season’s data is only a snapshot, so we need more data points to see a trend in the fundamentals.
Initially, I recommend you add the data for the past 4 - 8 quarters.
Add the absolute numbers (e.g. in $, %, or count)
Include comparisons like Year-over-Year and Quarter-over-Quarter for absolute or $ numbers (e.g. revenue in $, customer count)
Display profitability numbers also as margins (e.g. Free Cashflow as % of revenue = Free Cashflow Margin)
What to Look For
Are the metrics growing/improving?
Ex: earnings, revenue,e cashflow, or margins
Is there seasonality at play?
Ex: Q1 usually exhibits weaker revenue growth than the rest of the year
Any outliers or negative findings?
Ex: Customers going down, revenue falling off a cliff, continuously deteriorating margins
Step 2: The Conference Call – Getting into the weeds
Conference calls are awesome because they offer a platform for management to share insights and analysts to ask questions. Access the webcast (and sometimes the transcript) via the Investor Relations website.
What to Focus On
Analyzing a conference call is subtle, but you will get used to it. 😊
Ideas to get you started
Does Management sound confident?
Are the analysts mostly congratulating management?
What’s the focus of the prepared remarks?
Ex: Lately, a lot of AI talk
What are the analysts probing around?
Ex: Everyone asks about weak customer growth —> check your spreadsheet
Any explanations for outliers that you found in the fundamentals?
How to track
Simply jot down your thoughts in your preferred physical or virtual notebook. Personally, I like to use Notion, but you can use OneNote, Word, a notebook, etc.
When the next earnings season comes around, you’ll be thankful for your notes and can reference back on anything you would like to follow up on.
Step 3: Investing Diary – Taking control
Writing down insights and your thoughts is helpful to hold yourself accountable. It’s easy to put off hard decisions or be lazy about your portfolio (consider an ETF).
However, if you write down your thoughts, you’ll be more committed.
Ideas to get you started
Why are you holding this business in the first place?
Note your findings from your spreadsheet
Add here the notes from the call
How confident are you in this company and how much of it do yo want to own?
Share your thoughts with like-minded individuals to exchange thoughts and for maximum accountability.
For instance, I share my portfolio allocations and transactions monthly on Twitter/X: https://twitter.com/LisaOnCloouud9
Next Steps - Walking the talk
What, not done yet? Don’t worry, we are almost there.
Now, that you have your notes, use them to evaluate your investments:
Do you feel comfortable with your holdings?
Are any changes needed or a new company to add?
Do you feel comfortable with your portfolio allocations?
Remember: There is no right or wrong.
Your Investing Style.
Make sure your portfolio aligns with your financial goals, your tolerance for risk and volatility, and your time horizon.
And that’s a wrap! I hope you found this helpful to feel more prepared for the upcoming earnings.
If you have any questions, please drop them in the comments.
Track the fundamentals in a spreadsheet
Listen to conference calls + take notes
Take notes, e.g. in investing diary
Take actions (if needed)
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Cheers, and Happy Earnings Season! 🎉
Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.
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