Understanding Earnings Season For Profitable Trading & Investing

Earnings season is a period during which a lot of public companies release their earnings reports, which contain information about the company and its finances, as well as trends in the industry and economic growth more broadly.

The information gives shareholders and traders’ insights into the outlook for a company, which can in­fluence decisions about whether to buy or sell shares.

When is earnings season?

There’s no set start or end to earnings season, but it generally begins a few weeks after the end of each quarter and lasts for six weeks after the first report.

On the exchange, companies have up to 30 days from the end of the quarter to file their financial information with the Nigerian Exchange Limited (NGX). This gives us a general timeline of:

1. First quarter (Q1) earnings season – the fi­nancial quarter ends on March 31, so earnings season often begins in mid-April and runs until the end of May for late filers.

2. Second quarter (Q2) earnings season – the quarter ends on June 30, so earnings season normally starts in mid-July and runs until the end of August for late filers.

3. Third quarter (Q3) earnings season – the fi­nancial quarter ends on September 31, so the earn­ings season starts in mid-October and runs until the end of November for late filers.

4. Fourth quarter (Q4) earnings season – the financial quarter ends on December 31, so the earn­ings season begins in mid-January and runs until late march, as companies that release their unau­dited accounts have till March 31, to make available their audited financial statement for the year ended December 31, while companies that did not submit their unaudited accounts in January, has till end of February to file their audited reports.

However, the dates of reporting aren’t the same for companies and sectors of the market, which creates a standardised order of proceedings by sector.

It kicks off with early filers and usually ends with late filer especially when the numbers are not good.

That’s because of corporate governance level differs from companies. Also, their financial year end are not the same, so instead of finishing Q4 on December 31, they finish on January 31, March 31, and so on.

What is an earnings report?

An earnings report is a collection of financial statements that companies issue during earnings season, which details their profits (or losses) over the previous financial period. It’s divided into three sections:

1. The balance sheet – reports a company’s as­sets, liabilities and shareholder equity

2. The income statement – shows a company’s revenues, expenses and profitability

3. The cash-flow statement – summarises the amount of cash and cash equivalents entering and leaving a company

Together, these documents allow investors to take a peek under the hood of a company’s operations and see how they’re currently performing, and how that might change in the future.

Learn how to read an earnings report

There are a huge number of different figures that are covered throughout these three statements, but there are a few that analysts and market participants keep their eye on. These are:

Revenue – also known as the top line – is the money a company makes from its business operations.

Companies will focus on revenue figures as a way of assessing demand for products and services, but it’s important to look at how it stacks up against net income.

A high revenue coupled with a low or negative net income means a company isn’t managing its costs effectively, and this can be cause for concern.

Net income – also known as the bottom line – is the profit earned for the period. It’s calculated by subtracting costs from revenue.

Investors look at net income to decide whether a company is stable, as consistent profits mean it’s more likely to survive, thrive, and attract future in­vestment.

Operating expenses is the money a company has spent throughout the quarter in order to make its products.

It includes things like research and development, marketing, employee salaries and so on. While these detract from net income, some expenses are viewed positively by markets. For example, investment into R&D or additional headcount can be a sign the com­pany is expanding and confident in its future

Earnings per share (EPS) is a popular

metric that measures how much money a com­pany makes per share of its stock. It is one of the most-talked-about figures to come out of a compa­ny’s earnings report, as it’s a key way of estimating corporate value.

A higher EPS demonstrates higher profitability, which means more money available for reinvestment or paying a dividend to shareholders.

Earnings report information can be found on NGX website, on company websites and across a range of financial publications.

What is an earnings call?

An earnings call is a conference that takes place between a company’s executives and its sharehold­ers, the media and analysts. In the call, management will discuss the earnings report and answer ques­tions from those present, giving more background information on the company’s performance.

Not all companies give earnings calls. It’s standard practice mature market like US and others, but less common in our market today. If a company is having one, then details will be available on their investor relations corner or NGX through notification.

How does earnings season affect stock prices?

Earnings season tends to bring a lot of volatility with it, as there’s a flurry of activity from traders entering speculative positions and long-term inves­tors altering their holdings.

Ultimately, the volatility is driven by how the data in the reports compares with analysts’ predictions of the figures.

The estimates are usually priced into markets, so the only time significant price swings occur is if markets are surprised by the real figures, as recom­mendations are updated. If the earnings are in line with expectations, there tends to be less fluctuation in prices.

For example, if the market anticipates a strong earnings report for a particular company, but the company misses analyst predictions, there may be significant downward pressure on a stock. Converse­ly, better-than-expected earnings may rouse bullish interest.

However, the link between earnings and stock prices isn’t always so predictable. There are a range of other factors that can impact a stock’s price that market speculators should take into account, such as interest rates and economic data.

Earnings report trading strategy

Applying an earnings report trading strategy in­volves identifying the right stocks to follow, putting the time in to research their estimated earnings com­pared with analysts’ expectations, and building a risk management plan.

1. Identify the right stocks

Identifying the right stocks is crucial in prepa­ration for trading earnings. Now’s probably not the time to choose to trade a company you know nothing about. Instead, you should focus on companies that you have prior knowledge of and can understand how their share price reacted to previous earnings.

Some traders will choose to focus on larger stocks whose results impact wider industries, known as bellwether stocks. Not only do they experience high trading volumes but their earnings can act as a guide for the rest of the sector.

2. Research your stocks

Researching your chosen stocks involves looking at an­alysts’ expectations of the up­coming earnings, as well as learning about prior earnings performances and, naturally, be­ing aware of the dates that the company earnings are on.

Remember, while past results may give clues on how a specific stock might react to upcoming earnings reports, price move­ments after reports can be un­predictable.

Earnings that are better than expected may not experience price gains, just as disappoint­ing earnings may not spark a bearish run.

3. Manage your risk

When applying an earnings strategy, you should consid­er the high level of risk that comes with potential spikes in volatility and pay particular attention to a risk management plan, including profit goals, stop placement and hedging where necessary.

Also, those who favour tech­nical analysis should be aware that earnings releases have the potential to disrupt ongoing price trends, making it wise to place less emphasis on indica­tors such as key Fibonacci re­tracements at this time.