August is the month most publicly listed companies report their full-year earnings results. Savvy investors need to cut through the noise by focusing on how well expectations have matched up with reality. Here’s what you need to know about the share market’s ‘confession season’.
What is reporting season?
Throughout reporting season, publicly listed companies update the market on their performance. During this time it is mandatory for companies listed on the Australian Securities Exchange (ASX) to share their earnings, results and forecasts with shareholders.
To provide further financial transparency, many companies host conference calls to discuss their results and field questions from market analysts and the media. The information disclosed during earnings season can also reveal useful details about trends in various industries and the pace of economic growth more broadly.
The data released is then compared with market analyst estimates from before earnings season to determine how a company actually did (versus how the market expected it to do).
When does it take happen?
ASX-listed companies must report their earnings results to shareholders at least twice a year: as half-year results, and later as full-year results within two months of the end of their financial year.
Most locally listed companies have financial years ending on 30 June and they report their full-year results in August. Half-year results are generally released in February. Some companies with December ‘year ends’ will report their half-year results to June in August.
The small number of companies with financial years ending in other months – like September (for example, ANZ, NAB, Westpac), March (Macquarie), July or February – will not feature in the August earnings season.
A company’s website should have information about when it is scheduled to release its half and full-year earnings reports.
Why does reporting season matter?
Reporting season is a great time to access the most up-to-date information to evaluate a company’s financial health and strategic direction.
When a company’s full accounts are disclosed during reporting season, you can get information on its actual financial health and performance – along with its goals and outlook for the future. This includes viewing its exposure to manageable levels of risk, its internal cash flows, and seeing what dividends to expect (and whether they are sustainable).
Reporting season also allows for peer reviews to compare a company’s business to others in the same industry and allows investors to benchmark performance while gaining an insight into the strength of the broader sector.
It’s important to be aware that reporting season can cause extra volatility in the market. Companies may over or underperform what market analysts have forecast, which can lead to unexpected share price movements.
What’s in a financial report?
Financial reports are audited documents that contain financial statements outlining a company’s performance up to the end of the reporting period, including:
Balance sheet – This provides a snapshot of the company’s financial position at the end of the reporting period, including a summary of the company’s assets, liabilities and shareholder equity.
Income statement (profit and loss statement) – This shows a company’s financial performance over an accounting period (usually over 6 or 12 months). It provides a company’s revenue and expenses, allowing investors to gauge the company’s growth and profitability prospects.
Cash flow statement – This shows a company’s level of free cash flows and capital expenditures. These are typically broken into cash flows from operations, financing and investing.
Statement of changes in owners’ equity – The equity balance statement shows how much equity shareholders maintain in the company along with any changes made during the reporting period.
Financial forecasts of revenue and earnings for upcoming financial years.
Investor presentations can also be included. These may be useful in highlighting key strategic decisions for the company such as growth and expansion plans, cost-cutting measures and plans for mergers and acquisitions (M&A) activity or divestments.
Key takeaways for investors
Earnings season allows investors to examine a company’s financials in detail, but it also provides an opportunity to better understand what the company actually does, how it makes money, its social or environmental impacts (and how they are being managed), its place in the wider market, and its plans for future growth. Taking into consideration all these micro and macro factors can help investors build a clearer picture of a company.
Remember, before you invest in a company, it’s important to be aware of the risk you are taking, as past performance is no guarantee of future performance. The value of your share holdings and your portfolio overall can go up and down over time. By analysing the fundamental drivers of a company’s performance and reviewing the company’s financial data during reporting season, you can be better informed before making any decisions to buy or sell a particular stock.
Undoubtedly, COVID-19 will continue to cast its shadow over almost every result as the various ASX-listed financial, consumer discretionary, property and utilities companies report their financial numbers. The pandemic presents a threat for some, and provides opportunities for others. The coming weeks will be valuable in revealing how these companies are positioned to deal with the ongoing challenges posed by the Delta variant and how their businesses are responding.
Originally published by Schroders