Earnings report stock trends, profit and more but making sense of an earnings report can seem daunting especially in light of the catastrophic endings of Lehman Brothers, Enron and Worldcom. What is the best method of making sense from earnings reports? First and foremost, read between the lines and don’t be afraid of playing the role of cynic.
1. Don’t rely on corporate sponsored press release statements. They tend to play up the positive and down play the negatives. A press release isn’t required to comply with SEC (Securities and Exchange Commission regulations so don’t put much weight on it. Instead, take time to actually read the earnings report. It will include cash flow, income statement and balance sheet. That’s a lot of good information for those who take the time to read it.
2. Dare to compare. Don’t just look at quarterly growth but compare to year-over-year growth and even five year growth. Look for increased growth and be sure to take inflation into account before getting overly excited.
3. Track sales-to-receivable ratios. Abnormal ratios in this area are a common red-flag that could signify trouble ahead.