"Everything You Ever Wanted to Know About Earnings"- Reading the Numbers
Tuesday, April 17, 2007SUSIE GHARIB: It's that time of year again. All across corporate America, companies are reporting their latest quarterly profits. So tonight, we kick off a special three-part series aimed at getting you up to speed on corporate profits. It's called "Everything You Ever Wanted to Know About Earnings." Suzanne Pratt details the key items investors should look for in earnings reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: What takes center stage on Wall Street, happens four times a year and involves all U.S. public companies? The answer: quarterly earnings season, corporate America's equivalent to children bringing home report cards. Earnings expert Chuck Hill has been analyzing corporate profits for decades and says the weeks when Wall Street is bombarded with numbers are paramount.
CHUCK HILL, CHAIRMAN, VERITAS ET LUX: During that time, there's a great deal of focus on the earnings releases, not just to see what the results are for the current quarter, but also a lot of the companies will make some comments about what they see for the rest of the year or for the upcoming quarter.
PRATT: Every three months, publicly traded companies are required by law to report their financial results to the Securities and Exchange Commission. A quarterly report is also presented to the public in the form of an earnings release and made available on the company web site. For Wall Street, company management often hosts an earnings conference call, fielding questions from professional analysts about the news. A web cast of that call is usually posted on the company's web site. But individual investors may find the earnings news complicated, particularly, because there's no shortage of numbers to evaluate and no shortage of confusing terms. Net income, diluted earnings and operating income are some of the possibilities. All are different measures of a company's success. Ed Nussbaum, CEO of the accounting firm Grant Thornton, says earnings per share is the one to watch.
EDWARD NUSBAUM, CEO, GRANT THORNTON: For almost every company, the most important number is earnings per share, prepared in accordance with generally accepted accounting principles -- GAAP. And that needs to be disclosed and every investor should look at that number and compare it. It's a good number to compare with other companies.
PRATT: Other experts recommend focusing on operating earnings-- earnings that exclude one-time charges such as restructuring costs associated with a recent merger. The view is those costs are irrelevant to future profitability. Prudential chief investment strategist Ed Keon thinks investors should take their lead from analysts that follow the company, watching whichever number the analysts say is most important.
EDWARD KEON, CHIEF INVESTMENT STRATEGIST, PRUDENTIAL EQUITY GROUP: It may be frustrating to investors, but a lot of times, there's really no single clear number that everybody from the accountants to the press to the analysts all agree is the best number to use.
PRATT: Whatever earnings measure investors choose, financial experts say it's imperative that it be compared to the same number in the same quarter in the previous year. Did it grow? Did it shrink and, at what pace? Investors will also want to look at how earnings stack up against the expectations of Wall Street analysts, something a few firms now track. NYU Stern School associate dean Paul Brown says Thomson Financial's First Call is the most well-known of the earnings scorekeepers.
PAUL BROWN, ASSOCIATE DEAN, NYU STERN SCHOOL OF BUSINESS: Usually, the first conversation is not about the growth in a particular division. It's usually not about whether they expanded in Europe or Asia. It's usually about how much above or below the earnings are vis-a-vis the expectation established by First Call.
PRATT: Experts say earnings releases also contain other crucial measures of a company's health, the revenue line, sometimes called sales, bears watching, as it shows how much a company gets for goods and services. On top of that, Wall Street has become obsessed with projections a company may make about future performance, known loosely as guidance.
BROWN: Guidance is an interesting term in the corporate earnings world. It basically comes down to corporate CEOs and CFOs enticing analysts and the investment community as to what they expect their earnings to be next quarter, next year, for that matter.
PRATT: There's no question that navigating earnings season is difficult for all investors. But experts say, because there is a correlation between profit and stock performance, it's a crucial endeavor. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
