How to read a company's earnings report in ten minutes

A company reports a record quarter, beats Wall Street's estimate by a few cents, and the stock falls 8% the next morning. If that has ever made no sense to you, the explanation is usually sitting in the earnings release, just not in the headline. Here is how to read one in about ten minutes. This is plain-English education, not investment advice.

Start with the release, not the headlines

Public US companies usually publish results as a press release, filed with the SEC on a Form 8-K, followed by the fuller quarterly report on Form 10-Q. The release is the fast read. Open it and go straight to three numbers:

1. Revenue. Total sales for the quarter. Compare it with the same quarter last year, not the previous quarter, because many businesses are seasonal.
2. Earnings per share (EPS). Profit divided by the number of shares. This is the number headlines compare with the analyst consensus estimate, so "beat" or "miss" almost always refers to EPS.
3. Guidance. What management expects for next quarter or the full year. This is often the most important line on the page.

Know which EPS you are looking at

Most releases show two versions of earnings. GAAP EPS follows standard accounting rules. Adjusted, or non-GAAP, EPS strips out items the company considers unusual: restructuring charges, legal settlements, gains on selling a division, some stock-based compensation.

SEC rules require companies that present a non-GAAP number to also show the comparable GAAP figure and reconcile the two. Find that reconciliation table. A few genuinely one-time items are fine to set aside. A "one-time" charge that shows up every quarter is not one-time, it's a cost of doing business.

Check the quality of the quarter

Now the three minutes that separate a good quarter from a flattering one:

• Margins. Gross margin and operating margin tell you whether the company kept more or less of each dollar of sales. Revenue up with margins down can mean growth is being bought with discounts or rising costs.
• Cash flow. Find operating cash flow and capital spending in the cash flow statement. Profits are an accounting opinion. Cash is harder to argue with. Earnings rising while cash flow falls is worth a second look.
• The segment or product that matters. Most companies have one line of business investors watch most closely. If the total beat but that segment slowed, the market will notice.

Why a stock can fall on a beat

Prices move on the gap between results and expectations, and expectations are not just the published consensus. A few common reasons a good-looking quarter still sells off:

• Guidance for next quarter came in below what analysts expected.
• The beat came from a lower tax rate or a one-time gain rather than the business.
• The stock had already risen sharply into the report, so a beat was priced in.
• Margins or a key segment weakened underneath a healthy headline.

The headline tells you what happened last quarter. The guidance tells you what the market will argue about next.

It also helps to know how a particular stock has behaved around past reports. Some routinely move 2% after earnings, others 15%. Wall Street Friend shows exactly that history for thousands of US stocks: the average post-earnings swing, the beat rate, the biggest gains and drops, and a multi-year price chart. It also has a confidence-scored earnings calendar and lets you browse SEC filings like the 10-Q and 8-K, so you can open the actual documents. The research features are free, and the app is for research and education only. The how Wall Street Friend works post covers the mechanics.

Read the next report with this checklist beside you, and the morning-after move will start to look less like a mystery and more like arithmetic.