What is Earnings Season?
Earnings season refers to the period of time when a large volume of publicly traded companies release an official statement of their profitability. Public companies are legally required to publish their financial statements to keep investors informed about their financial health. This allows them to make informed decisions about whether they want to buy or sell shares of a company.
In the days leading up to a company’s earnings announcement, analysts spend significant amounts of time forecasting models in order to derive an estimate for earnings per share (EPS), sales, EBITDA, and other key metrics.
Key Learning Points:
- Earnings season is the quarterly fiscal period when publicly traded companies publish their financial statements.
- Earnings announcements have an impact on stock prices, which can move up or down based on the company’s performance.
- Analysts forecast how the company will perform, but these estimates can quickly shift up or down in the days prior to the announcement.
During earnings season, most companies announce their financial performance through press releases and filings with the Securities and Exchange Commission (SEC). A full earnings report can usually be found in the investor relations section on a company’s website.
In the US, companies are required to announce their earnings each quarter. This typically begins about two weeks after the quarter ends and runs for about six weeks. Given below is a general timeline for when earnings season begins each year.
- Quarter 1 ends March 31st: earnings season is from mid-April to May.
- Quarter 2 ends June 30th: earnings season is from mid-July to August.
- Quarter 3 ends September 31st: earnings season is from mid-October to November.
- Quarter 4 ends December 31st: earnings season is from mid-January to late February.
Dates may vary based on whether a company works on a fiscal calendar, in which case their earnings would be 1 month later. Upcoming earnings releases can be tracked online through resources like the Nasdaq online earnings calendar.
Implications to the Market
When the market responds to earnings announcements, stock prices will be impacted in a major way, whether prospects are positive or negative.
If a company’s earnings surpass analysts expectations, this is known as an “earnings surprise”. This can typically lead to an increase in individuals buying stock, which can cause stock prices to rise. However, if the earnings announced are lower than projected this is known as a “negative earnings surprise”, which can result in a sell-off of stock and lead to a sharp decline in stock prices.
Equity analysts review earnings reports to assess whether a company is meeting its expectations. If a company’s results beat or miss analyst’s projections, financial models will have to be adjusted to account for the newly reported figures.
Important Metrics to Watch Out For in Earnings Reports
Earnings per share (EPS) is a key metric that helps shareholders estimate the value of the company’s shares during the reported period and it measures the total profits that are available to be allocated to each shareholder. The basic formula for EPS is the following:
EPS = Earnings / Number of Shares
Price-to-Earnings Ratio (P/E ratio) is used to measure the relationship of a company’s stock to its earnings per share of stock issued. It is also used to compare valuations with another company in the same industry and to gauge whether a stock price is high or low compared to the past.
P/E ratio is calculated by dividing the company’s stock price by its earnings per share (EPS) (usually the market uses diluted earnings per share).
P/E ratio = Stock price / EPS
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a prominent figure on a company’s reports and is widely used in valuation. EBITDA measures profitability, although it doesn’t take into account interest, taxes, and depreciation. A high EBITDA can signal good financial health for a company and it can be used to compare companies against each other and industry averages.
EBITDA is calculated as follows:
|+/- Non-recurring items|