An earnings report is the picture of the company’s overall financial health. Companies ensure this document must be as encouraging as possible without violating the regulations set by the Securities and Exchange Commission (SEC) and deceiving the investors on its overall status. However, many investors find difficulty in assimilating an earnings report. While the report is mostly numbers, investors should still understand the details found in them.

What is the 10-Q Report?

Companies are mandated to submit their 10-Q (Quarterly Report) and 10-K (Annual Report) with the SEC. This form must be used to report their financial status every quarter under Section 13 or 15(d) of the Securities Exchange Act of 1934, and be submitted no later than 45 days after the end of each fiscal quarter.

Upon releasing the report, the firm should post a press release outlining the contents of this black-and-white report. Frequently, this article has few paragraphs of details including statements from company executives and explains certain key elements of interest to investors such as revenue, net income, cash flow, earnings per share, and Earnings Before Interest & Tax (EBIT).

Contents of a 10-Q Report

It is a good start to read the press release. But for a greater picture, read the firm’s 10-Q. The form is divided into two parts: Financial Information and Other Information.

Part I: Financial Information has four items:

  • Financial Statements
  • Management’s Discussion and Analysis of Financial Condition and Results of Operations
  • Quantitative and Qualitative Disclosures About Market Risk
  • Controls and Procedures

Part II: Other Information

  • Legal Proceedings (Risk Factors)
  • Unregistered Sales of Equity Securities and Use of Proceeds
  • Defaults Upon
  • Senior Securities
  • Mine Safety Disclosures
  • Other Information
  • Exhibits

Interpreting the Earnings Report

Investors have different ways of assessing and interpreting the 10-Q. Certain investors skip the opening sections and go straight to reading the management’s explanation on the market, as well as the risks facing the firm. Others just read the figures and compare the digits to previous quarterly reports or annual reports.

The first part of the document has the following details: the company filing the report, filing period, state where the firm is incorporated in, tax identification number (TIN), and primary business location. It also has the table of contents stating the sections found on every page.

After those basic details, the investor should move on and dig deeper into Part I: Financial Information. While evaluating and analyzing the data, an investor should concentrate on the following: the firm’s current performance, its performance compared to the past quarter, and its sales. Also, look into the cash flow statement to determine whether the company is earning cash from on-going operations or is using it.

There are always two sides in a coin. So after looking at its financial data, check out the risks the company might be facing in the coming quarters. Find out also if a firm has outstanding lawsuits. If that is the case, look at Legal Proceedings. The company with outstanding lawsuits must report these along with a short description of the suit’s nature. Take into the account the lawsuit’s potential financial impact to the company’s overall value. Several firms face small damage claims every year. But a huge lawsuit can make such a difference on the company.

Underneath Legal Proceedings is the Risk Factors. This portion lists down the most significant perils applicable to the company according to its importance. It focuses on the risk themselves, not the way these are resolved. Risks vary from company to company, which can be part of the overall market trend or a larger problem. Some statements such as "Given the current environment our operations do not generate sufficient cash may be seen," or "Inadequate liquidity could affect our future operations" may be seen in this document.