Investology

Decoding Data On The Earnings Reports

The earnings report is one of the important documents traders and investors can look into in order to gauge just how financially healthy a company may be. It provides a means for traders and investors to determine the current status of a publicly traded company financially. Despite this important data, a lot of investors still don’t effectively use the earnings report to their advantage when it comes to trading and investing.

It takes a keen eye to look for nuggets of information from a company’s earnings report. Aside from the skill it takes to read exactly what is being presented from the report, reading between the lines may also provide a key to the company’s true financial condition as well as future. After all, management would want to always paint bright picture about the company through their earnings report. Here are some of the important areas to look out for in the report that may be of important concern for traders and investors alike.

Trending Sales

Growing or increasing sales always is a positive trait in many companies as reported in their earnings reports. It may indicate growth and increasing profit. But it is just as important to look at sales trends rather than just the increased sales. One thing to determine from company reports is what percentage of such sales is made on credit. If this percentage continues to grow, then it may indicate that the company may not actually be making actual sales that turn into profits since there is a chance such sales may be returned.

Inventory Report

Inventory is another indicator to watch out for in an earnings report. A company with an increased inventory can mean two things- either it is increasing production to satisfy demand or it is having difficulties getting products to sell in the market. What investors should try to look for is the rate that their products may be going out the door. Too large an inventory may also indicate products not getting sold and an instance where a company may need to drop prices which can affect profitability.

Tracking Cash Infusions

Cash infusions may be away to boost up earnings in a company. But certain types of cash infusions may paint a picture that may be totally opposite of how a company might be doing. One-time cash infusions would certainly bolster a company’s earnings report. But if they come from a source other than actual product sales, then they might be considered as suspect. There are some cash infusions that has nothing to do with a company’s business that may be included as revenue. It may be one time cash infusions as a result of lawsuits or earnings made from the company’s pension fund. They may actually be used as a deceptive means to paint a rosier business climate than what the company may be actually in.

Tags: earnings reports