Fundamental analysis · Fundamentals

Reading an Earnings Report

The four numbers that move a stock every quarter.

Level: BeginnerTimeframe: DailyStyle: SwingMarkets: Stocks

What it is

Every quarter, public companies report their results. The stock reacts to how those results compare with what analysts expected, and above all to management's guidance for the future. Earnings create gaps, so traders either plan around them or trade the reaction after the news is out.

How it works

• Compare earnings per share (EPS) and revenue with the analyst consensus estimate. The surprise is what moves price.
• Read the guidance: what management expects next quarter often matters more than the past quarter.
• Check margins: is the company keeping more of each dollar it sells, or less?
• Watch the reaction: a big gap up on heavy volume that holds is a sign of institutional buying.
• A common approach is to wait for the report, then buy if price holds above the gap for a few days.

Pros

• Clear, scheduled catalyst
• Gaps on big volume often start multi-week trends
• Defined risk below the gap

Cons

• Holding through the report is a gamble
• Gaps can fill quickly
• Requires tracking earnings calendars

Common mistakes

• Buying right before the report hoping for a beat
• Judging the result without reading guidance
• Chasing the first minutes after the open

Lesson transcript

Part two: reading an earnings report. Four times a year, every public company tells the world how much money it made. And four times a year, its stock can jump or crash overnight. The first number is earnings per share, or E P S. It's the profit divided by the number of shares. But what matters isn't the number itself. It's how it compares to what analysts expected. Grey bars are the estimates. Coloured bars are the actual results. The second number is revenue, the total sales. Growing revenue means customers want more of the product. Profits can be boosted by cost cuts for a while, but real growth comes from sales. The third piece is guidance, what management expects next quarter. Often it matters more than the past. A company can beat estimates and still fall if it warns that the future looks weaker. The fourth is margins. Is the company keeping more of every dollar, or less? Now let's see it on a chart. This stock drifts sideways for weeks before its report. Then it beats estimates and raises guidance. It gaps up on huge volume. That volume is big institutions buying. We don't chase the open. We wait a few days to see if the gap holds. When price stays above the gap and starts making higher lows, we buy, with a stop below the low of the gap day. And the move continues. Strong earnings gaps often start trends that last for weeks, because big funds can't buy everything they want in a single day. Recap. Check E P S and revenue against expectations, read the guidance, and watch the margins. Don't gamble before the report. Trade the reaction once the news is out. Next, valuation ratios.

More lessons

See all 16 trading lessons