A key market event at the beginning of every quarter is the reporting of earnings from public companies. Over a few weeks, hundreds of companies will share their financial results, and the market will decide what it means for that company’s present and future prospects. Another element of earnings season is what it means for the broader equity indexes like the Dow or S&P 500.
In an earlier episode of OpenMarkets Weekly, Jack Bouroudjian covered how to gauge valuation during earnings season, and how the results affect these equity indexes. This week, he explores another critical element of assessing earnings: how to evaluate an earnings report. Jack covers three basic components:
1. Top line revenue: A company’s total revenue throughout the world. It’s important to understand how that revenue was created. If a great portion of revenue is generated overseas, then currency risk is inevitable.
2. Bottom line revenue: Where corporations will expense capital expenditures and stock buybacks. Breaking down the bottom-line numbers also gives investors an idea of true profitability.
3. Guidance issued by a company: What determines the price to earnings ratio. It’s the collective guidance which drives the multiple on the entire equity market. For a review on market multiples, watch our earlier episode on earnings.
“Earnings are the lifeblood of equity markets,” says Jack. “Understanding the various components is essential for all market participants.”
Watch the full episode above.