Four times a year, listed companies open their books, and the market listens carefully. During these weeks, Sensex Today Live pages are full of stories about stocks leaping or tumbling after results are announced. Followers of benchmarks such as the DAX in broader coverage see a similar pattern of reaction, which shows how deeply earnings influence prices everywhere. For Indian investors, learning to read results sensibly can turn a confusing period into a rich source of insight.
Look Beyond the Headline Profit
The first number that you see is rarely the most important number. It could be a case of ‘one-off’ – a one-off sale of an asset or tax adjustment; the mainstay of business could have been weaker. Revenue growth, operating profit margins and cash flow from operations are some numbers that you should look at. If sales growth continues and margins remain stable, it’s a good sign. If profits grow while sales stagnate, it’s time to think.
Compare With Expectations
Markets often trade on expectations, so it is important that you analyse the result compared to expectations. Analysts write reports and publish forecasts every season. If a company has delivered a decent set of numbers but has missed analysts’ estimates, be prepared for a fall in its share price. Similarly, a company with mediocre results but good upside surprises can see its share price jump. It will help if you spend some time understanding the estimates game.
Management Commentary Matters
The press conference or the call that the company management undertakes after the results are announced is far more important than the results themselves. Try to focus on what they have to say about the outlook, about input prices and about order books. Read between the lines if the management is guiding cautiously for the next quarter or are upbeat about their outlook for the year ahead. Watch out for mixed signals and vague commentary and explanations that sound like an excuse.
Sector-Specific Metrics
There are certain metrics that you must focus on depending on the sort of company that you are looking at. Net interest margin, asset quality (gross and net NPA) and credit growth are important for banks. Deal pipeline, attrition, margin growth and margins are important for technology companies. Volume growth is far more important than pricing growth for consumer companies. Order books and cash flows are critical for real estate and infrastructure. The idea is to learn two or three metrics that are critical for every sector that you invest in so that you can evaluate the results better. This helps you take a deeper dive into the results.
Avoid Reacting Impulsively
Reactionary trades often end up being expensive. It is important not to get sucked into the hype and noise around the results. Algorithms and large institutional investors trade on the news almost instantly, so it is best to take a step back and read the report thoroughly before taking any action. For long-term investors, getting the right takeaway from the results is far more important than taking a trade. One quarter of weak results will not destroy a good business, nor will one quarter of good results build a great business.
Track Trends, Not Single Quarters
Build a simple spreadsheet with numbers on revenue, profit, margins and debt for the last 8-12 quarters. It is important to build a sense of the trends that are developing. One should always compare the results with the same period last year. While most companies report a seasonal pattern of sales, it is important to look at trends. Festive sales, for instance, can distort the numbers in the case of automobiles and retail. Do not compare a quarter with the previous one; compare it with the same quarter last year.
Conclusion
Every year, during the earnings season, markets become a classroom for investors. By taking a deeper look at the results, evaluating it compared to expectations and understanding the context in which the results should be evaluated, one can arrive at a fair valuation of a company. This is how one learns the art of investing.
