As the earnings season will begin soon, I decided to write a simplified yet detailed thread on ‘How to read and understand the quarterly result of a company’.
Read patiently.
Bookmark if required.
RT if found useful. 👇🧵 (1/n)
Read patiently.
Bookmark if required.
RT if found useful. 👇🧵 (1/n)
1⃣Why are quarterly results important?
The shareholders have put their hard earned money in the company.
So, they must know about the affairs of the company. But, they can not have access to the books of accounts. (2/n)
The shareholders have put their hard earned money in the company.
So, they must know about the affairs of the company. But, they can not have access to the books of accounts. (2/n)
Only and only the management of any company can access the books.
Hence, to give a snapshot of company’s financial performance, listed companies are required to publish ‘Quarterly Results’, which are available in public domain. (3/n)
Hence, to give a snapshot of company’s financial performance, listed companies are required to publish ‘Quarterly Results’, which are available in public domain. (3/n)
Also, before we start the details, one must have a basic understanding of ‘Financial Year’ and ‘Quarters’.
A financial year normally starts from 1st April and ends on 31st March the following year. This is divided into 4 equal periods; each one is a ‘Quarter’ (3 months). (4/n)
A financial year normally starts from 1st April and ends on 31st March the following year. This is divided into 4 equal periods; each one is a ‘Quarter’ (3 months). (4/n)
As per SEBI guidelines, every listed company needs to publish quarterly results in 45 days after the quarter end except the last quarter. This is simplified in the image above. (5/n)
Please note that it is companies which have a custom of uploading the quarterly results as early as possible are the ones which do not have anything to hide or cook. For instance, the entire earnings season starts with giants like Infosys and TCS. (6/n)
On the other hand, whenever a company delays the quarterly results or postpones them after announcing a date, it must trigger caution for an investor. (7/n)
For instance, Yes Bank delayed its quarterly results for the Q-3 of FY 2019–20, which ended on 31st December 2019. It filed the results on March 14, 2020.
And we all know of all the major developments that took place before the results. (8/n)
business-standard.com
And we all know of all the major developments that took place before the results. (8/n)
business-standard.com
Also, in past there have been companies fined by NSE for not filing the quarterly results altogether. The names include infamous companies like Gitanjali Gems, Amtek Auto, etc. (9/n)
economictimes.indiatimes.com
economictimes.indiatimes.com
2⃣How to compare results? (Q-O-Q or Y-O-Y)?
For the uninitiated, Q-O-Q stands for Quarter on Quarter and Y-O-Y stands for Year on Year. (10/n)
For the uninitiated, Q-O-Q stands for Quarter on Quarter and Y-O-Y stands for Year on Year. (10/n)
When we compare the numbers of a company on sequential basis, i.e. on Q-O-Q basis, we are comparing Q-2 of current financial year with Q-1 of same financial year. (11/n)
Thus, we would be able to judge the performance of a company and make a conclusion if or not it is performing better this quarter compared to the immediately preceding quarter. (12/n)
On the other hand, in Y-O-Y basis, we are comparing Q-1 of current financial year with Q-1 of last financial year.
To sum up, (13/n)
To sum up, (13/n)
So, which comparison is correct? Q-O-Q or Y-O-Y?
The answer depends on the sector to which the company belongs.
In case of cyclical stocks or companies which are seasonal, there may be a quarter where the company performs best compared to other quarters. (14/n)
The answer depends on the sector to which the company belongs.
In case of cyclical stocks or companies which are seasonal, there may be a quarter where the company performs best compared to other quarters. (14/n)
For instance, in case of Auto companies, the ‘Diwali’ quarter is the best one.
Hence, comparing the numbers on Y-O-Y basis makes more sense because of a strong second half (H-2). So is the case with Steel, Power and Cement companies, where Y-O-Y comparisons must be done. (15/n)
Hence, comparing the numbers on Y-O-Y basis makes more sense because of a strong second half (H-2). So is the case with Steel, Power and Cement companies, where Y-O-Y comparisons must be done. (15/n)
However, in case of Telecom companies or IT companies, Q-O-Q comparison makes more sense.
The reason is the fact that these companies do not have any seasonality. (16/n)
The reason is the fact that these companies do not have any seasonality. (16/n)
Also, YTD (Year to Date) comparisons are quite useful. YTD helps us in analyzing the performance of the company from the start of the financial year till the date quarter.
Hence, the YTD numbers for Q-3 will have numbers from 1st April to 31st December. (17/n)
Hence, the YTD numbers for Q-3 will have numbers from 1st April to 31st December. (17/n)
P.S : The entire year 2020 was an exceptional year due to covid. Hence, in F.Y 2020–21, comparing the numbers on Y-O-Y basis won’t make any sense as the base is too small. (18/n)
3⃣Impact of quarterly results on stock price
Stock price more often than not react to quarterly result of a company.
Also, note the below interesting observations: (19/n)
Stock price more often than not react to quarterly result of a company.
Also, note the below interesting observations: (19/n)
👉 Even if there is increase in profits on Q-O-Q or Y-O-Y basis, the stock can tank because market expectations is an important factor. If the profits are below expectations, the stock will fall. (20/n)
👉 Even if performance of a company is above expectations of street, stock may still fall after results. This may be because people were anticipating good results and the stock already rallied before the results. That’s why the saying : ‘Buy the rumour, sell the news’. (21/n)
👉 Sometimes, even after a bad result, the stock may still rally. This may be because of good management commentary. Do note that it is not mandatory for the companies to give guidance or commentary of their plans. (22/n)
4⃣ What aspects to focus on? (23/n)
5⃣ Analysis of the P & L account
🔴Topline of the company:
👉Gross Sales:
Gross sales indicate the total sales of the company before discounts and returns from customers. Gross sales show how the company is performing operationally. It depends on (24/n)
🔴Topline of the company:
👉Gross Sales:
Gross sales indicate the total sales of the company before discounts and returns from customers. Gross sales show how the company is performing operationally. It depends on (24/n)
🚩Volume: It refers to the total number of units sold. Larger number represents good market penetration.
🚩 Price: Higher price shows that the company is having good command and customer loyalty. (25/n)
🚩 Price: Higher price shows that the company is having good command and customer loyalty. (25/n)
👉 Net Sales: Net Sales indicates the sales of company after discounts and returns. (26/n)
🔴 Operating Income and Net Profit:
To understand the entire concept of operating income, let us understand this example in detail. (27/n)
To understand the entire concept of operating income, let us understand this example in detail. (27/n)
EBITDA or Earnings before interest, tax, depreciation and amortization helps one to understand how the company is going through its regular business activities, i.e. its operations. (28/n)
Please note that in EBITDA numbers, we have not deducted interest on borrowings, depreciation on assets and amortization on intangibles like goodwill. (29/n)
This is because different companies from same sector may have different amounts and dates of buying fixed assets, different finance structures, etc.
So, EBITDA numbers help one to compare the numbers with peers for understanding the financial performance of the company. (30/n)
So, EBITDA numbers help one to compare the numbers with peers for understanding the financial performance of the company. (30/n)
EBTDA margin in this case are 60%. It is calculated by dividing EBITDA by Sales. Again this is useful for comparing with peers. (31/n)
EBIT is calculated by subtracting depreciation from EBITDA.
Further, one can calculate PBT by deducting interest from EBIT. And finally Net Profit (PAT) is arrived at by deducting tax from PBT. (32/n)
Further, one can calculate PBT by deducting interest from EBIT. And finally Net Profit (PAT) is arrived at by deducting tax from PBT. (32/n)
Net Profit helps one to understand the individual performance of a company.
This can again be compared on Q-O-Q or Y-O-Y basis as discussed previously. This is nothing but the bottom line of the company. (33/n)
This can again be compared on Q-O-Q or Y-O-Y basis as discussed previously. This is nothing but the bottom line of the company. (33/n)
I will try to cover other aspects in a different post. Until next time! (34/n)
You can alternatively read this thread here,
swapnilkabra.medium.com
You can alternatively read this thread here,
swapnilkabra.medium.com
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