After a quarterly earnings press release and an earnings call, public companies will release an official quarterly earnings report with the Securities and Exchange Commission called a 10-Q. This is an important document that gets into detailed financial numbers and discloses business risks. In this segment from "Beat & Raise" on Motley Fool Live recorded Oct. 5, Fool.com contributors Jason Hall, Brian Withers, and Nicholas Rossolillo talk about what they look for on a quarterly earnings report.
Brian Withers: I guess to your point, Nick, I'm not down on non-GAAP, but I want to be transparent. What's the difference between GAAP and non-GAAP? There should be a little table that shows you the three things that they subtracted and explain potentially why that they're doing that and why this non-GAAP metric is better for their business, or better indicator of what's going on. If I feel like management is hiding some thing from me, that's the worst feeling.
Jason Hall: Yeah, no doubt about it. Here's how I think about adjusted numbers. For example, a company in our report adjusted EPS, which is non-GAAP earnings-per-share because they've taken the generally acceptable accounting practices and they've deviated from that. But then you have other non-GAAP numbers, they're not in GAAP, GAAP doesn't explain for them to even exist. For RPO, for example, remaining performance obligation, which is basically a backlog of contracted revenue that a company has. Those numbers, dollar-base net retention revenue. They're really important numbers because in a lot of cases they can help explain why the GAAP numbers might look really bad, but maybe the stock kept going up because the business is actually doing really well.
Nicholas Rossolillo: Like free cash flow. Sorry.
Hall: No, absolutely. I was going to say that because actually a lot of times that's what happens, is you see earnings are terrible, but then they reports some of these other non-GAAP numbers are really good, and then you start looking at cash flows and it's like, oh wow, cash flows are going way up even though earnings are down or negative, Nick, go ahead.
Rossolillo: I just mentioned free cash-flow in particular. I think that's a pretty common metric a lot of investors will look for, it's actually non-GAAP as well. Some companies just report it now and say that it's non-GAAP, but others you have to wait for that 10-Q and calculate it yourself sometimes. There are a handful of companies here and there that doesn't give the condensed statement of operating income on the press release. We have to wait for the 10Q to get the detailed breakdown of that to calculate free cash flow.
Not to pick on Netflix (NFLX 0.10%) because it's a great company and I know it's done very well. But that's one where the opposite is the case where the earnings look fantastic, and then you calculate the free cash flow and it's the opposite, it's been negative for years. That's a business model thing, and the comfort level with business model and what the company is trying to accomplish. Knowing the company, what the story is and the most important metric for its business model dictate, I think, maybe how important the financial tables in the 10-Q are going to be, but especially the risks and disclosures of 10-Q. You're not going to get that in the press release and earnings call. That's where you have to really dig in if you want to understand the true risks and investing in the company.
Hall: Brian, all of those things tell the story of the company, and that's what we're trying to fully understand the story of the company. Not just the GAAP numbers, not just operating cash flow, not just the adjusted numbers or the non-GAAP numbers, but the story of the business, and if that story is one of growth, is one of increased earnings potential over time, is one of longevity, is one of disruption, or is one of company or management making excuses, or it's simply not what we thought it was going to be when we decided to invest.
