Understanding Company Results
If you are an investor i.e., a shareholder of a particular company, then you would be eager to know how the company is performing. One of the ways of finding this is having a look at the company’s current market price, but to get a more in depth look into the company it becomes necessary to read and analyse the quarterly numbers published by the company.
Quarterly Results
According to the market watchdog, Securities and Exchange Board of India (SEBI), guidelines it is compulsory for every listed company to produce quarterly results and these quarterly results need to be produced in a predefined format and are to be made available to the general public to understand the company’s performance from time to time.
Quarterly results are early indicators of the company’s progress towards achieving its yearly targets. That’s not all, it can tell you about the real worth of the company and lot more.
Normally, when most of us look at these quarterly results, we just look at Revenues and Net Profit figures. But there is a lot which needs to be read into these results.
Making an investment decision just looking at the Revenues and Net Profit figures cam be disastrous, as it does not give you the right picture about the company at a given point of time. This is because there are certain deductions like depreciation, tax or amortisation that may eat away earnings leaving nothing in terms of Net Profit. But this may not reflect the true picture.
To get a better picture about the company’s performance, apart from Revenues and Net Profit, you need to look at other things like – Other Income, Expenditure, Interest Payments on Debt, Operating Income, Earnings Per Share (EPS), etc.
Let me explain you below what you need to look into these figures.
Terms related to Companies Accounting Results :
Revenues : In case of company results, revenue is the money that a company earns from its normal business activities, which may include sale of goods and services to customers. It is often known as Sales or Turnover.
Other Income : In case of company results, other income constitutes income earned by the company from transactions not involved in daily operations of a business. For example, interest income, rent income, profit from sale of assets, etc.
Total Income: It is a sum total of Revenues and Other Income.
Expenditure : Operating expenses: These are expenses that arise during the course of running a business. Operating expense consists of items such as salaries paid to employees, research and development costs, legal fees, accountant fees, bank charges, office supplies, electricity bills, business licenses.
Interest Cost : It refers to the cumulative sum of the interest paid on loans by the company. Increase in interest cost depicts rise in debt of the company. However, proper deployment of debt is important along with rise in sales and profit otherwise rising interest cost will eat the profitability of a company.
Depreciation : Depreciation is the systematic reduction in the recorded cost of a fixed asset. Businesses depreciate long-term assets for both tax and accounting purposes. A significant increase in the depreciation cost may indicate that either company is expanding in a big way or there is more that normal wear and tear in its machinery and other assets. We need to do a detailed analysis to find all this.
Profit Before Tax (PBT) : It is the profit figure of the company obtained by deducting all expenses from the total income or net revenues of the company except for income tax. The metrics of Profit Before Tax (PBT) exists because tax expense is constantly changing, and taking it out helps to give an investor a good idea of changes in a company’s profits or earnings from year to year.
Tax : The word tax needs no explanation !
Net Profit : The term net profit or net income is popularly known as ‘bottom line’, and it shows the company’s net earnings or losses.
Earnings Per Share (EPS) : It is the monetary value which indicates how much a company is earning per share that it has floated in the market. It is obtained by dividing the company’s profit by its number of common outstanding ordinary shares.
Earnings per share serves as an indicator of a company’s profitability and it often used to calculate the P/E Ratio (Price to Earnings Ratio) of the company which often indicates whether the company is relatively expensive or inexpensive as compared to its peers in the same industry or conducting same nature of business.
Standalone and Consolidated Results :
Consolidated results come into picture when one company (Group Company or Holding Company) holds a controlling interest in another company or companies (Subsidiaries and Associates).
Consolidated financial result covers the activities of the parent company and its subsidiaries in a single report, as if they were all a single company operating under one roof.
Stand-alone financial result, treats each entity as if it were entirely separate — the parent unrelated to the subsidiaries, and the subsidiaries unrelated to one another.
There are many companies which report both Standalone and Consolidated financial results every quarter, however there are companies which prefer to report just standalone results every quarter and they report the Consolidated results only annually for the entire financial year.
Now as an investor, while analysing profits you need to analyse both standalone and consolidated results as your intention is to profit not only for the revenues of the parent company but to profit also from the revenue which will be generated by the subsidiaries and associates. This is extremely relevant today since companies are increasingly setting up subsidiaries to diversify into new verticals. There are several examples wherein the parent company is infact making losses yet on a consolidated basis the entity is profitable.
Further, in case of any large diversified company such as Reliance Industries, Tata Steel, Tata Motors, L&T, etc subsidiaries will contribute substantially to the overall performance of the consolidated entity.
Comparison of Results :
Looking at results of just one quarter or one financial year is not enough. You need to compare results with results declared by the company in prior periods to find out in which directing the company is moving ahead.
There are two methods to compare the quarterly performance i.e. quarter-on-quarter (QoQ) or year-on-year (YoY).
QoQ is a comparison of a quarter with a quarter just prior to the current quarter. For instance, a comparison of results for the quarter ended March 2016 (Q4) with the results for the quarter ended December 2015 (Q3). This is also known as sequential comparison.
YoY is a comparison of a quarter with the corresponding quarter a year ago. For instance, a comparison of results for the quarter ended March 2016 (Q4) with the results for the quarter ended March 2015 (Q4).
The results of the companies whose business is subjected to seasonal or cyclical fluctuations (Example – FMCG, Auto, Cement, Retail, Infrastructure, etc) should be compared on YoY basis while companies whose business is not subjected to such fluctuations (Example – Technology, Pharma, Telecom, etc) should be analysed on QoQ basis.
QoQ indicates short term performance of the company while YoY measures the long term direction and consistency in performance.
One Final Word !
Just Results alone don’t affect the share prices and its fluctuations, it is expectations of people, market, market players, economic conditions, global factors, etc which also need to be taken into account.
Hence, there is no standard yardstick to gauge the impact of results announced the the company on the rise or fall of market price of its share.
There are many other factors such as the business environment, plans and the fundamentals of the companies that one should take into the account while buying or selling.
Do not take buy or sell decision on the basis of quarterly results only. Investor should check other factors such as policies of the company and other fundamentals of companies.
Disclaimer : This article is written for educational purpose only. It should not be seen as any investment advice. If any person after reading this article, invests in shares or mutual funds or any other financial instrument, and by any circumstances, inabilities, mistakes or due to any reason whatsoever, incurs losses then writer of this article, the website – earningsindia.com, its management and employees shall not be responsible singly or jointly for the losses.
Every individual should invest or trade in equities taking advice or registered financial experts or his own understanding, perception, common sense along with proper and logical calculations.
If you are an investor i.e., a shareholder of a particular company, then you would be eager to know how the company is performing. One of the ways of finding this is having a look at the company’s current market price, but to get a more in depth look into the company it becomes necessary to read and analyse the quarterly numbers published by the company.
Quarterly Results
According to the market watchdog, Securities and Exchange Board of India (SEBI), guidelines it is compulsory for every listed company to produce quarterly results and these quarterly results need to be produced in a predefined format and are to be made available to the general public to understand the company’s performance from time to time.
Quarterly results are early indicators of the company’s progress towards achieving its yearly targets. That’s not all, it can tell you about the real worth of the company and lot more.
Normally, when most of us look at these quarterly results, we just look at Revenues and Net Profit figures. But there is a lot which needs to be read into these results.
Making an investment decision just looking at the Revenues and Net Profit figures cam be disastrous, as it does not give you the right picture about the company at a given point of time. This is because there are certain deductions like depreciation, tax or amortisation that may eat away earnings leaving nothing in terms of Net Profit. But this may not reflect the true picture.
To get a better picture about the company’s performance, apart from Revenues and Net Profit, you need to look at other things like – Other Income, Expenditure, Interest Payments on Debt, Operating Income, Earnings Per Share (EPS), etc.
Let me explain you below what you need to look into these figures.
Terms related to Companies Accounting Results :
Revenues : In case of company results, revenue is the money that a company earns from its normal business activities, which may include sale of goods and services to customers. It is often known as Sales or Turnover.
Other Income : In case of company results, other income constitutes income earned by the company from transactions not involved in daily operations of a business. For example, interest income, rent income, profit from sale of assets, etc.
Total Income: It is a sum total of Revenues and Other Income.
Expenditure : Operating expenses: These are expenses that arise during the course of running a business. Operating expense consists of items such as salaries paid to employees, research and development costs, legal fees, accountant fees, bank charges, office supplies, electricity bills, business licenses.
Interest Cost : It refers to the cumulative sum of the interest paid on loans by the company. Increase in interest cost depicts rise in debt of the company. However, proper deployment of debt is important along with rise in sales and profit otherwise rising interest cost will eat the profitability of a company.
Depreciation : Depreciation is the systematic reduction in the recorded cost of a fixed asset. Businesses depreciate long-term assets for both tax and accounting purposes. A significant increase in the depreciation cost may indicate that either company is expanding in a big way or there is more that normal wear and tear in its machinery and other assets. We need to do a detailed analysis to find all this.
Profit Before Tax (PBT) : It is the profit figure of the company obtained by deducting all expenses from the total income or net revenues of the company except for income tax. The metrics of Profit Before Tax (PBT) exists because tax expense is constantly changing, and taking it out helps to give an investor a good idea of changes in a company’s profits or earnings from year to year.
Tax : The word tax needs no explanation !
Net Profit : The term net profit or net income is popularly known as ‘bottom line’, and it shows the company’s net earnings or losses.
Earnings Per Share (EPS) : It is the monetary value which indicates how much a company is earning per share that it has floated in the market. It is obtained by dividing the company’s profit by its number of common outstanding ordinary shares.
Earnings per share serves as an indicator of a company’s profitability and it often used to calculate the P/E Ratio (Price to Earnings Ratio) of the company which often indicates whether the company is relatively expensive or inexpensive as compared to its peers in the same industry or conducting same nature of business.
Standalone and Consolidated Results :
Consolidated results come into picture when one company (Group Company or Holding Company) holds a controlling interest in another company or companies (Subsidiaries and Associates).
Consolidated financial result covers the activities of the parent company and its subsidiaries in a single report, as if they were all a single company operating under one roof.
Stand-alone financial result, treats each entity as if it were entirely separate — the parent unrelated to the subsidiaries, and the subsidiaries unrelated to one another.
There are many companies which report both Standalone and Consolidated financial results every quarter, however there are companies which prefer to report just standalone results every quarter and they report the Consolidated results only annually for the entire financial year.
Now as an investor, while analysing profits you need to analyse both standalone and consolidated results as your intention is to profit not only for the revenues of the parent company but to profit also from the revenue which will be generated by the subsidiaries and associates. This is extremely relevant today since companies are increasingly setting up subsidiaries to diversify into new verticals. There are several examples wherein the parent company is infact making losses yet on a consolidated basis the entity is profitable.
Further, in case of any large diversified company such as Reliance Industries, Tata Steel, Tata Motors, L&T, etc subsidiaries will contribute substantially to the overall performance of the consolidated entity.
Comparison of Results :
Looking at results of just one quarter or one financial year is not enough. You need to compare results with results declared by the company in prior periods to find out in which directing the company is moving ahead.
There are two methods to compare the quarterly performance i.e. quarter-on-quarter (QoQ) or year-on-year (YoY).
QoQ is a comparison of a quarter with a quarter just prior to the current quarter. For instance, a comparison of results for the quarter ended March 2016 (Q4) with the results for the quarter ended December 2015 (Q3). This is also known as sequential comparison.
YoY is a comparison of a quarter with the corresponding quarter a year ago. For instance, a comparison of results for the quarter ended March 2016 (Q4) with the results for the quarter ended March 2015 (Q4).
The results of the companies whose business is subjected to seasonal or cyclical fluctuations (Example – FMCG, Auto, Cement, Retail, Infrastructure, etc) should be compared on YoY basis while companies whose business is not subjected to such fluctuations (Example – Technology, Pharma, Telecom, etc) should be analysed on QoQ basis.
QoQ indicates short term performance of the company while YoY measures the long term direction and consistency in performance.
One Final Word !
Just Results alone don’t affect the share prices and its fluctuations, it is expectations of people, market, market players, economic conditions, global factors, etc which also need to be taken into account.
Hence, there is no standard yardstick to gauge the impact of results announced the the company on the rise or fall of market price of its share.
There are many other factors such as the business environment, plans and the fundamentals of the companies that one should take into the account while buying or selling.
Do not take buy or sell decision on the basis of quarterly results only. Investor should check other factors such as policies of the company and other fundamentals of companies.
Disclaimer : This article is written for educational purpose only. It should not be seen as any investment advice. If any person after reading this article, invests in shares or mutual funds or any other financial instrument, and by any circumstances, inabilities, mistakes or due to any reason whatsoever, incurs losses then writer of this article, the website – earningsindia.com, its management and employees shall not be responsible singly or jointly for the losses.
Every individual should invest or trade in equities taking advice or registered financial experts or his own understanding, perception, common sense along with proper and logical calculations.
