How To Read Earnings Reports: A Simple 3-Step Framework

Embrace Earnings Season With Confidence

It’s that time of the quarter again - but how to read an earnings report?

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:

• Press/Earnings Release

• Investor Presentation

• Shareholder Letter/Supplemental

• SEC-Filing/10-Q

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)

• Customer Growth

• Free Cashflow

• Margins

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.

Tips

• 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.

Alternatively, you can find the transcript and recording of the call on sites like fool.com (free), Seeking Alpha* (limited free articles), or QuartrApp (partially free).

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

• Investment thesis

  • Why are you holding this business in the first place?

• Fundamentals

  • Note your findings from your spreadsheet

• Conference call

  • Add here the notes from the call

• Conviction:

  • How confident are you in this company and how much of it do yo want to own?

Bonus:

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.

Your Portfolio.

Your Money.

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.

In Summary

1. Track the fundamentals in a spreadsheet

2. Listen to conference calls + take notes

3. Take notes, e.g. in investing diary

4. Take actions (if needed)

Cheers, and Happy Earnings Season! 🎉

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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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