Home / Money / Calculators /  Understanding a company’s quarterly results

The stock markets in the next few weeks will be driven by quarterly reporting of financial performance by listed companies. Stock prices will adjust to the numbers and future expectations will be based on newly available information. If the results are better than expected, more people will want to own the stock and share prices will go up. But if the company results fail to match investor expectations, some people might want to exit from the company and, as a consequence, share prices will fall. Quarterly numbers are an important tool for investors in assessing the performance of a company.

According to clause 41 of the listing agreement, a listed company has to file quarterly, year-to-date and annual financial results to the stock exchange, where it is listed, within 45 days from the end of the quarter in a prescribed format. These include details of the quarter ended, the preceding quarter, corresponding quarter last year, year-to-date figures of the current year, comparative figures for the last year and numbers for the previous year. If the company has subsidiaries, it is required to file consolidated results as well. Investors should look at consolidated numbers as it gives the complete picture. Further, if a company earns revenue from more than one segment, it is expected to file segment-wise numbers as well.

The statement

There are broadly three segments—income, expenditure and profits—in the income statement that a company files on a quarterly basis. However, there could be different items under these heads. For example, a manufacturing company will have expense on raw material which a pure service company may not have. The first part shows the income from operations during the quarter. Plus, there could be other operating income as well, such as fee and commissions. It is business-related but is not from the main business of the company. After income, comes the expense incurred during the quarter. This will include, for example, expense on raw material, employee costs and other expenses.

After deducting the expenses from income comes the profit or loss from operations. If the company has some other income during the quarter and also has finance cost, the numbers are adjusted for the same to arrive at profit before tax. After accounting for the tax liability during the quarter, net profit is arrived at. Net profit is net of everything. Meaning, all expenses and liabilities of the company during the quarter has been taken care off.

Finally, the net profit is divided by the number of shares outstanding to arrive at the earnings per share (EPS). Some companies may also have exceptional items. This is typically a one-time expense, but can have significant impact on the net profit. This could include variation in the foreign exchange or provisioning for settlement of some lawsuit.

It is important to note that the above structure is for non-banking companies and banks have a different structure of reporting. Companies are also expected to report the shareholding pattern at the end of the quarter and the details of pledged shares, if any, along with the number of investor complains received, disposed, and outstanding during the quarter.

What to look for

There are a number of things that investors can look for in quarterly results. Says Gajendra Nagpal, chief executive officer, Unicon Financial Intermediaries Pvt. Ltd: “It is important to see if the revenue and profits are growing or not. One should also see if revenue is growing at the cost of margins; if yes, then it is warning sign." It is possible that in order to increase revenue, the company begins to take a hit on profitability. This is not seen as a healthy sign for the company. However, what if the company is not able to show growth in a quarter, should you be selling the stock? “If revenue is not growing at the desired pace and if the margins are intact, one should not go and sell the stock," says Devang Mehta, head (equity sales and advisory), Anand Rathi Financial Services Ltd.

There are chances that the company is not able to grow at the desired pace due to difficult economic environment, but if it is not sacrificing profitability to increase revenue, it may not be a good idea to sell the stock immediately. Investors should also see that interest payments, if any, are at comfortable levels.

In case of banks, investors should look at the non-performing assets and the net interest margins. However, just looking at the quarterly numbers may not be enough for investors to take an informed decision. Says Alex Mathews, head-research, Geojit BNP Paribas Financial Services Ltd: “Investors will also have to look at things such as cash-in -hand and if the company has some pledged shares or not." The status on pledged shares is available with the quarterly result, but all companies may not be declaring their cashflow statement on a quarterly basis. Says Lalit Kumar, partner, J. Sagar Associates, a law firm: “According to clause 32 of the listing agreement, companies are required to give cash flow statement along with the annual accounts in the annual report." However, companies have to file statement of assets and liabilities on a half-yearly basis. So, investors would do well by looking at the asset-liability statement with the September quarter result as it marks the passage of half year of the current financial year. I t’ s also important to look at the notes to the financial statement as it could contain important information such as change in accounting policy.

Mint Money take

Quarterly financial performance shows how much the company earned as revenue, how much it spent under various heads to earn the same and how much it retained as profits for its shareholders. The most important thing, perhaps, from the shareholder point of view is to see how the EPS is improving. It is the EPS that the shareholder gets. The company may not distribute it immediately, but it is shareholders money which can be used by the company for further expansion. Further, if the EPS is improving at a better rate, so will the stock price in the market. For example, if the EPS grows from 10 to 12 during the year, and the share is trading at a price-earnings ratio of 20, other things being equal, share price should also move from 200 to 240. If the EPS is declining, the share price will also fall. However, investors should refrain from selling shares in case the company has had one bad quarter, unless it is an indication of a trend. Investors should also see the EPS is not getting pushed because of higher one-time income. Therefore, it is important that quarterly results are carefully studied along with other factors (such as fundamentals) to take an informed decision on the stock.

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