Share prices tend to move in tandem with corporate financial performance of a company. Better the earnings of a company, better is the chances of the share price rallying. Companies in India declare quarterly results every three months.
Company A (Rs in crores)
|Quarter ending Sept 30, 2015||Quarter ending Dec 31, 2015|
|Operating profit||Rs 400||420|
|Net Profit||Rs 300||320 crores|
|Extra Ordinary Income||Rs 0||Rs 0|
|EPS||Rs 22||Rs 22.2|
Now let us take the above with an example.
1) Study the revenues first
Look at the revenues of the company above. It shows that there has been a growth on a quarter-on-quarter basis. Would you consider that substantial or significant?. It looks more like a revenue growth of 4 per cent. In tough business conditions, it can still be considered as okay. If the economy is growing at 7-8 per cent, the company should do much better than the 4 per cent growth in revenues posted above.
2) Take a look at the net profits
Like revenues, one can see that the net profits of company A have also grown marginally and in the same proportion on a quarter-on-quarter basis. Look for an extra ordinary items that may have boosted net profits. Take a look at any sale of asset, sale of investment in the quarterly numbers. Anything that is onetime, must be taken note.
3) Look for interests costs
See quarter-on-quarter if the interests costs have gone-up. This means that the company may have increased its borrowings or interest rates may have gone up. If the borrowings may have increased substantially, it may not be good news for shareholders.
4) Take a careful look at growth in EPS
Earnings per share is an important parameter in determining how share prices move after the quarterly results are announced. So, if there is a decent EPS growth, there could be a rally in the stock. Remember, even if the profits go up, the EPS need not, because the equity capital would have gone up. So, it is also important to study the growth in the equity capital of the company. This could happen through share allotment to promoters, employees, qualified institutional placement etc.
5) In case of banks
In case of banks, you should look at parameters like non performing assets (NPAs) and net interest margins. A high level of NPAs is certainly not good for banks. On the other hand an improvement in net interest margins is also good. Look at also what is called CASA (current And Savings Account) and its growth.
6) Management commentary and guidance
Many companies provide future guidance. For example, Infosys. Many other companies provide management commentary, which should indicate what the future holds for the company in the near short to medium term. From time to time many companies also make investor presentations. You could also go through brokerage research reports, in which a good analysis is done after the quarterly numbers are announced.