How You Can Make Sense of an Earnings Report

It is the earnings season again. Although an earnings report might be one of the most boring reports you can read during your free time, it contains useful information on any company that you are invested or interested in. And, if you do read one carefully, you might realise that it’s an endeavor that’s definitely worth your time.

Income Statement

The income statement allows you to know if your company is growing or facing problems by comparing how each line of expense has changed over the years.

If there is a larger-than-normal difference between each year, it might be a prompt for you to delve deeeper. For example, Frasers Commercial Trust (SGX: ND8U) has more than halved its finance-related expenses in its latest annual result. That might be something that requires more research to understand the whole situation.

Balance Sheet

The balance sheet gives us a snapshot on the current financial health of the company. You can use the balance sheet to understand how much debt the company has.

You can also do some ratio analysis. One such ratio would be the current ratio, which can give us an idea on a company’s ability to meet its entire short term obligations. The current ratio is the ratio of a company’s total current assets to its total current liabilities.

Typically, a company requires a current ratio of at least 1 to be considered healthy. Frasers Centrepoint Ltd (SGX: TQ5), in its latest full-year financials, has total current assets of S$5.9 billion while having S$3.5billion worth of current liabilities. This gives the company a current ratio of 1.69.

Cash Flow Statement

The Cash flow statement gives you an understanding on how actual cash flows in-and-out of a business. In other words, it shows us the sources of both cash inflows and outflows. Frasers Centrepoint Trust (SGX: J69U) for example, is able to generate S$113 million in cash from its daily operations in its latest financial year while spending only S$ 9.5 million on capital expenditures (the purchase of long-term equipment, property, and plants).

Certain Footnotes

Most earnings reports also contain footnotes which gives you more detail over the changes in certain numbers. For instance, Frasers Centrepoint Ltd’s latest financials showed an increase of 46% in operating income. The related-footnote would tell you that most of the increase stems from an uptick in revenue of the company’s Singapore development business. This is one such example of how footnotes can be useful.

Management Discussion and Analysis

Management discussion and analysis is an essential part of any earnings report. It allows you to better understand how management views the business. Often, we can gain valuable insight on the current state and future prospects of the business.

Foolish Bottom Line

Reading an earnings report is a critical part of the investment process. Once you are able to find where all the vital information is, it might just help you in making better-informed investing decisions.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.