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How to Read and Understand an Earnings Statement 

 February 7, 2022

By  Shawn T.

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Do you ever feel like you’re reading a foreign language when looking at an earnings statement? Many business professionals feel that way. However, by understanding the different sections of an earnings statement and how to interpret them, you’ll be able to make sound business decisions. In this blog post, we will provide a detailed guide to understanding and interpreting earnings statements. We’ll cover everything from revenue and expenses to net income and earnings per share. By the end of this post, you’ll be able to read and understand any earnings statement like a pro!

What is an Earnings Statement?

An earnings statement, also known as a profit and loss statement, is a document that shows how much revenue a company has earned over a certain period of time and how much money it has spent during that same period. The earnings statement is divided into four main sections: revenue, expenses, net income, and earnings per share (EPS).

Revenue is the amount of money a company has earned from its sales or services. Expenses are the costs of doing business, such as salaries, rent, and materials. Net income is the amount of money a company has earned after subtracting its expenses from its revenue. EPS is earnings per share, which is calculated by dividing net income by the number of shares outstanding.

The most important thing to remember when reading an earnings statement is that it represents a snapshot in time. The numbers may change from one quarter to the next, so it’s important to compare earnings statements over several quarters or years to get a better understanding of how a company is performing.

Now that we’ve covered the basics, let’s take a closer look at each section of an earnings statement.

Revenue:

This section shows how much money a company has earned from its sales or services. The revenue figure can be found at the top of the earnings statement and is typically divided into two categories: product sales and service revenues. Product sales are the money a company earns from selling goods, while service revenues are the money a company earns from providing services.

Expenses:

This section shows how much money a company has spent on its operations. Expenses can be divided into five main categories: cost of goods sold (COGS), operating expenses, interest expense, income taxes, and extraordinary expenses.

Cost of goods sold (COGS):

COGS is the amount of money a company spends to produce or purchase goods that will be sold to customers. It includes the cost of materials, labor costs associated with producing the goods, and transportation costs.

Operating expenses:

Operating expenses are all other business-related expenses that aren’t included in COGS. These may include rent for office space, utilities, advertising fees paid to third parties such as Google AdWords or Facebook Ads Manager (FAM), legal fees related to contracts, or intellectual property (IP) protection like trademarks and patents, and accounting and consulting fees.

Interest expense:

Interest expense is the amount of money a company pays to borrow money. This section will list the total amount of interest paid during the reporting period as well as the average interest rate on outstanding debt.

Income taxes:

Income taxes are the taxes that a company has to pay on its earnings. This section will show how much income tax was paid during the reporting period, as well as how much was deferred (temporarily postponed) until a later date.

Extraordinary expenses:

Extraordinary expenses are unusual or one-time costs that don’t happen very often. They can be caused by events such as natural disasters, lawsuits, or plant closures. This section will list any expenses that don’t fall into the other categories listed above.

Net Income:

This section shows how much money a company has earned after subtracting its expenses from its revenue. It includes both earnings before taxes (EBT) and earnings after taxes (EAT). EBT is calculated by taking total revenue and subtracting all expenses except income tax, while EAT is calculated by taking total revenue minus all expenses including income tax.

The difference between these two numbers represents net earnings or profit for the reporting period in question. For example, if your business made $100 million in sales but had $95 million worth of COGS plus another $30 million worth of operating expenditures like rent, utilities, etcetera then it would have an EBT figure of $30 million ($100-$95-$30 = $30). If this business were subject to a 20% income tax rate then its earnings after taxes (EAT) would be $24 million ($30*(80%)=$24).

Earnings Per Share (EPS):

This figure is used to calculate the amount of money that each share of a company’s stock is worth. EPS is calculated by dividing net earnings by the number of outstanding shares. This section will list the total number of shares that were outstanding during the reporting period as well as the weighted average number of shares over the past twelve months. The weighted average number of shares takes into account how many shares were issued and sold on different dates. For example, say your business has 100 million outstanding shares and its earnings after taxes are $24 million. That would give it an EPS value of $0.24 ($24/100=$0.24).

When is an Earnings Statement Released?

Every three months, publicly listed firms must submit a quarterly earnings statement to the Securities and Exchange Commission (SEC). Companies submit their 10-Q to the SEC for each of the first three quarters of their fiscal year (which does not always correspond to a calendar year), an unaudited document that outlines their financial performance. These are available to anybody—all you have to do is know the company’s stock ticker or name.

After the fourth quarter, businesses submit a 10-K, which is a more comprehensive annual report that includes additional financial statements, management expectations, executive compensation, organizational structure, and other information.

Most publicly listed firms have an earnings call at the end of each quarter, during which executives discuss their 10-Q and expectations and answer questions.

When a company releases its earnings report, you’ll often hear analysts say whether or not the company “beat” or “missed” expectations. This means that analysts predicted how well the company would do across different metrics, and if the company did better or worse than these predictions, it is said to have “beaten” or “missed” expectations.

We hope this guide to earnings statements was helpful! Understanding these reports is crucial for making sound business decisions, so make sure you bookmark this page for future reference. Thanks for reading!​

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