How to read an earnings report: the five numbers that matter

Four times a year, public companies report their results, and markets react — sometimes violently — within minutes. But an earnings report is long, and most of it is boilerplate. A handful of numbers do most of the talking.

1. Revenue, and its growth rate

Revenue — total sales — is the top line, and its direction matters more than its size. Compare it to the same quarter a year earlier to strip out seasonality. Accelerating growth is the strongest simple signal a business can send; decelerating growth, even at a large company, is what most often worries investors.

2. Net income and margins

Profit is what remains after costs. Just as informative is the margin — profit as a share of revenue — because it shows whether the company is becoming more or less efficient as it grows. Expanding margins suggest pricing power or discipline; shrinking margins invite questions.

Markets move on surprises, not absolutes. Analysts publish forecasts ahead of each report, and the share-price reaction usually reflects the gap between reported earnings per share and those expectations — which is why a company can report record profits and still fall.

4. Cash flow

Accounting profit involves judgment; cash is harder to argue with. Operating cash flow shows whether the business actually generates money. A company reporting profits while burning cash deserves a closer look.

5. Guidance

Often the most market-moving item is not the past quarter at all, but management’s forecast for the next one. Weak guidance regularly outweighs a strong quarter, because investing is ultimately a claim on the future, not the past.

The takeaway

Read revenue growth, margins, the surprise versus expectations, cash flow, and guidance — in that order — and you will understand most earnings reactions before the commentary explains them.

This article is general information, not individual investment advice.