Q: It's earnings season. What I should be focusing on when my stocks report earnings?
We're about a week into 2017's second-quarter earnings season, so if you own stocks, many of them have probably already reported, or are going to within the next few weeks.
Although each company's earnings per share (bottom line) and revenue (top line) numbers and how they compare with analysts' expectations typically dominate the headlines, they aren't the most important part of a company's earnings report. In fact, an earnings beat or miss all by itself matters very little from a long-term perspective. Just ask any longtime Amazon.com shareholder if they're still concerned that the company missed earnings estimates in the third quarter of 2016. The stock is up 26% since then, so I doubt it.
My point is that it's important to look at things in an earnings report that matter not only in an immediate sense, but give you a better idea of where the company is headed in the future.
My largest stock holding, Bank of America (BAC 1.05%), recently reported an excellent second quarter, and not just because earnings and revenue numbers exceeded expectations. Instead, the figures that stood out to me as a long-term investor were the bank's profitability metrics (return on assets and return on equity), which showed significant improvements and operations that are becoming more efficient. These trends could lead to a sustainable boost in profitability, which could mean better returns for years to come.
The point is that if you're going to read your stocks' earnings reports (which you definitely should do), be sure to pay attention to more than just the top and bottom lines, and read with a long-term perspective in mind.
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