How to read a company's financial results: revenue, profit and debt

Where to find a company's financial results

US companies publish results four times a year, in their quarterly reports, and once a year in the annual report. Many UK and European companies report every six months instead. You'll find the reports on the company's website, under “Investors” or “Investor relations,” and on the stock exchange's website.

A report has three main financial statements. You don't have to read them line by line. It's enough to know what to look for in each:

1. Income statementWhat it sells and earnsrevenue, costs and net income for a period
2. Balance sheetWhat it owns and owesassets, debts and equity on a given date
3. Cash flow statementHow much money really came incash from operations, investing and financing

On the stock pages of einvestitii.ro you'll find these numbers already calculated and explained for every company, over several years.

Revenue: how much the company sells

The first line of the income statement is revenue, meaning sales. It doesn't tell you whether the company makes money, but it does tell you whether the business is growing.

To make the numbers easy to follow, we use a made-up company, Example Co. Figures are for one year, in millions of dollars:

Example Co. does not exist. The numbers are chosen to be easy to follow.

Always compare revenue with the same period last year. If it rose from 900 to 1,000 million, growth is about 11%.

Profit and margins: how much the company keeps

Costs are taken out of revenue step by step. At each step you can work out a margin: how much is left from every $100 of sales. The most used are the gross margin, the operating margin and the net margin.

At Example Co., every $100 of sales leaves $11 of profit for shareholders. The direction matters more than the level: a margin that rises year after year shows an increasingly efficient business.

Earnings per share and analyst estimates

Earnings per share (EPS) is net income divided by the number of shares. It is the number everyone watches at each report, because you can compare it directly with the share price.

Before the report, analysts estimate EPS. If the reported number is above the estimate, the company is said to have beaten estimates. But the price also reacts to what the company says about the coming quarters, known as its outlook or guidance. A good quarter with a weak outlook can send the price down.

Cash: the profit that actually reached the bank

Profit is an accounting number. You see real money in the cash flow statement. The most useful number there is free cash flow: cash from operations minus investment in factories, equipment or software.

Free cash flow pays for dividends, share buybacks and debt repayment. If a company reports a profit year after year but its free cash flow is always small or negative, find out why.

Debt: how big the risk is

The balance sheet shows the company's loans and bonds. What matters is net debt: financial debt minus cash. You compare it with operating profit before depreciation, called EBITDA.

A ratio of 1 means Example Co. could pay off all its net debt from one year of operating profit. Under 2 is comfortable; above 4 is heavy debt. Read more under debt / EBITDA.

How to read an earnings report in 5 minutes

1. Revenue against last yearDid it grow? By how much? Steady growth is the first good sign.
2. The net marginDid it rise or fall against last year? A shrinking margin points to pressure on costs or prices.
3. EPS against estimatesDid it beat estimates or miss them?
4. Free cash flowIs it positive and close to profit? If not, look for the explanation in the report.
5. Net debtHas it risen a lot? How does it compare with EBITDA?
6. The outlookWhat does the company say about the next quarters? For the price, it often matters more than the past.

Once you can read the numbers, the next step is to find out whether the stock is cheap or expensive compared with them, for example with the P/E ratio.