Young Investor

Earnings season simplified

Updated on: Apr 16, 2011

Want to know how the companies you invested in have performed this quarter? Well, with the results season having just begun, we decode for you some of the market terms that are oft-used during earnings announcements.

Top line and bottom-line

The two main data points that you will need to monitor when results announcements are made are sales and profits. Sales, the figure which appears as the topmost entry in a financial statement is referred to as the top line. Net profits, which come in among the last few items is referred to as bottom line. Generally, the results of companies can be looked up in their web sites, in printed annual reports or in the announcements section of the stock exchange web sites all round the year. You will also find companies reporting their financial results in the form of advertisements in newspapers.

Q-o-Q and Y-o-Y

Topline and bottom line by themselves aren't enough to evaluate a company's performance. You would need to base the performance over the sales and profit numbers of previous quarters; say, the same quarter of last year or the quarter before. Comparing the performance over earlier quarters helps put the company's scorecard in perspective. For instance, now that the fourth quarter results announcements will be made, you will find comparisons being made with the third quarter (QoQ) as well as the fourth quarter of last year (YoY).

Standalone and Consolidated

More often than not, companies, especially those that have overseas operations, have many subsidiaries (businesses in which the parent company has a controlling stake). So when results announcements are made, you will need to take note of their performance on a consolidated basis and standalone basis. While consolidated results take into account the performance of subsidiaries too, standalone results capture only the performance of the company involved . So which results should you consider? Well, if your company gets substantial revenues and earnings from its subsidiary businesses, keeping a tab on consolidated performance will help. In such cases, even analysts view the results by splitting the performance of the entity on standalone and consolidated terms.

Consensus estimates

Before the start of the earnings season, brokerage firms and in-house research teams of business newspapers and channels put out estimates on the companies' earnings. These estimates are generally based on numbers already announced by companies, for example - earnings guidance in the case of IT companies, despatch figures in the case of cement companies and sales numbers of auto manufacturers. Over and above that, analysts give out their earnings expectations too. Pooling the estimate earnings figures across research houses for individual companies, you get the ‘consensus estimate'. Depending on the range of earnings predication, you also have optimistic and pessimistic forecasts. When the actual results come, analysts peg it to the consensus and term it ‘better-than-expected', ‘along expected lines' or ‘below expectations' accordingly.

Earnings guidance

When a company's management gives a forecast on its earnings, it is called ‘earnings guidance.' After all, who would know the company's growth potential better than the insiders! IT majors such as Infosys and Wipro give their earnings guidance, forecasting the earnings/revenue growth for the following year or the subsequent quarter considering both the macro environment and the internal developments. Select companies from other sectors too give out yearly revenue and profit guidance.

Need any other investment-related help? Feel free to write to us at >younginvestor@thehindu.co.in

Published on April 16, 2011

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