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Corporate Earnings: How Investors Can Use Them For Investment Decisions?


It is earning season already, with results of the second quarter being announced for different corporate this time around. And other than the broader macro and micro factors, earnings of a particular company do play a pivotal role in shaping its current and future performance.

Corporate Earnings: How Investors Can Use Them For Investment Decisions?

And here in we'll discuss what all financial data is of paramount importance for investors to consider during their investment cycle in the stock. Also, the results for the second quarter hold all the more importance due to current volatility in which the stock markets across the world is reeling.

So, here are put across some important parameters which investors can consider to look at:

Some financial terms

EBITDA or Earnings before interest, tax, depreciation, amortization: This is more synonymous to the company's operating performance and should not be taken into account much more closely in comparison to other financial parameters. It gives a sense of direction of the company's performance.

Profit after tax or PAT is the net income for the company that does not provides a true picture of the cash flow position in the company. It is however, net income of the company after deducting for taxes, depreciation and interest.

EPS or earning per share is further dependent on the performance of the company and higher the EPS more is the positive effect on the stock of the company.

Debt in company's books: It is an important metric and throws light on the proportion of debt in the company i.e. being used to finance different assets of the company. By thoroughly studying the company's books that is made up of company's balance sheet and P&L statement, one needs to keep an eye on debt to equity ratio as well as debt to EBIDTA ratio.

Debt in the company's books also is reflective of the company's business nature as in the case of IT company there is negligible debt while in case of increasing debt in a company on a year on year basis it denotes the capital-intensive nature of the company's line of business.


Also, when a company engages in a drive to lessen its debt exposure over the years, it impacts its stock price positively as the margins increase due to cost saving that otherwise goes as interest pay-outs on debt.

Within this broader analysis of debt in the company's books, you also need to take account of gearing ratio which is the percentage of debt in comparison to the company's equity and is expressed as percentage figure. So, a company with a lower gearing ratio and healthy cash flow is in a normal case deemed to stand out in performance.

Guidance: Guidance in terms of earnings or revenues is provided not as part of some legislation but comes in handy for the stock market as well as analysts in correctly arriving at the company's valuations without much variation. So what is guidance? What Is Guidance In Quarterly Results of Corporates? It is actually nothing more than the estimates of the future earnings of a company. The expected results are provided to the stakeholders and market watchers as what is envisioned for a particular future course of time.

What all guidance value includes?Guidance value can be provided in terms of earnings or revenues. It may also be expressed as margins and capital spending estimates. The IT industry provides dollar revenue guidance which means their earnings estimates in dollar terms as they primarily outsource their services and make earnings in dollar currency.

In the current scenario, when currencies across the world are hit with dollar also seeing mixed trend, the momentum shall not work in favour of either importers with rupee depreciation nor it may be good for exporters who export to nations with a downturn in their currencies.

Reserves: Equity dilution over time also does not pan out good for the company and instead gives an impression of the reserves in hand in the company. And for a company, if the profit and net sales are growing despite negative working capital, this straight away implies that the company is faring with customer's money paid in advance. This is taken to be a negative for the company and the company stock.

In the other case, expansion is good for the company which is reflected by the increase in fixed assets.

Read more about: earnings financial results
Story first published: Monday, October 29, 2018, 5:48 [IST]
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