How Novice Investors Should Read Earnings Reports

You don’t need to be a Wall Street expert to get useful information directly from a company’s quarterly release.

Motley Fool Staff
Motley Fool Staff
Jul 2, 2019 at 9:04AM
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It would be hard to find a podcast-hosting duo more fully invested in answering your financial questions than Alison Southwick and Robert Brokamp -- they even put "Answers" in their show's name! This week they're at it again, combing through the Motley Fool Answers mailbag in search of conundrums to address for their listeners. But because three heads are better than two, for this episode, they have recruited senior analyst -- and frequent podcast guest -- Ron Gross to help out.

In this segment, they give a student some advice about how an investing beginner can, and should, make sense of the number salad that is a quarterly earnings report.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 25, 2019.

Alison Southwick: The next question comes from Montash. "I'm a student who's just beginning to get into the world of investing. I always hear that you should read earnings reports for the companies you invest in. What can I do to make sense of the numbers? I have no idea if the numbers are good or bad. Should I just be reading more other financially literate people's analyses?"

Ron Gross: This we did discuss a little bit...

Southwick: I did, yes.

Gross: ...but we can revisit it. This is good. I think it's always good to read what a company says focusing on the words first. Let's leave the numbers aside. That has to do with what a company does, and how it makes money; but, each quarter how's it doing. The CEO will make comments. There'll often be a conference call where analysts can ask questions. So it's really nice to just hear what the company has to say.

Then you can look at the numbers and focus on the trends. You don't have to be an expert about what a good gross margin is, or a good operating margin is, or how to calculate free cash flow. Look at the trends. Is the company increasing their revenue each year? Are they increasing their profits each year? Does it [continuously go up and down]? Are those things maybe deteriorating and going down? Looking at trends can tell you a lot and used in conjunction with what the CEO is telling you about their business should be really enough, I think, for the average investor.

Southwick: Do you listen much to the earnings calls?

Gross: I read them more than I listen to them.

Southwick: I'm wondering how often you can just tell from a CEO's tenor how excited he or she is about the future of the company? If they're like, "Ohhh!"

Gross: You have to be careful, because some CEOs are sales-y, and you don't really like that. I don't like when CEO's talk about their stock price a lot. I want them to talk about the business and let the stock worry about itself. But you can gauge if someone's really upbeat about the business, but if it doesn't jive with the way the numbers look then it seems a little fishy, so you want the two things to go hand in hand.

Southwick: What about reading other people's analyses?

Gross: Always good if you can get your hands on other people's analyses. It's sometimes quite difficult to maybe get your hands on a Goldman Sachs report or a Morgan Stanley report; but we are here, as Fools, for our members and that's what we do all day long, is read these reports and offer our opinions. Definitely this is one place you can trust. And Google is there for you, too. You can always google a company and you'll get an article here or there from a financial expert or perhaps an analyst. All that information is useful, too.