Earnings season is that time when many companies quoted on an exchange publish their financial reports whether quarterly or audited full-year, containing information about the company and its performance during the period. Such reports could also indicate trends in a particular industry/sector, or the economy, put more broadly. Such information gives shareholders and traders insights into the outlook for a company, which can influence decisions about whether to buy, sell or hold its shares.

When Is Earnings Season?

There’s no set start or end to an earnings season, but it generally begins a few weeks after the end of each quarter, and lasts for six weeks after the first report in the particular industry or sector is released. On the Nigerian Exchange, for example, companies have up to 30 days from the end of each quarter to file their financial information.

This gives us a general timeline of:

1. First quarter (Q1) earnings season– This quarter ends on March 31, so the earnings season often begins mid-April and runs until the end of May for late filers.
2. Second quarter (Q2) earnings season– the quarter ends on June 30. As such, earnings season could run from mid-July to until August for late filers.
3. Third quarter (Q3) earnings season– ends on September 31, while the season starts in mid-October well into the end of November.
4. Fourth quarter (Q4) earnings season– closes on December 31, so the earnings season begins in mid-January and runs until late March. Companies that release their unaudited full-year accounts have until March 31, to provide their audited financial statement for the full-year, while those that did not submit an unaudited account in January, has till end of February to file their audited reports.

However, the dates of reporting are not the same for all companies and sectors of the market. This creates a standardised order of proceedings for each sector.

Each reporting period kicks off with early filers and usually ends with late filer. This is especially true of those whose numbers are not good, or below expectation, even as corporate governance levels differ from company to another. 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 the season, detailing their profits (or losses) over the previous or comparative period. It is divided into three sections:

1. The balance sheet – reports a company’s assets, liabilities and shareholder equity.
2. The income statement – shows the revenue, expenses and profit.
3. The cash-flow statement – summarises the amount of cash and cash equivalents entering and leaving a company

Together, these document allow investors to take a peek under the hood of a company’s operations to see how it is 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 earns or generates from its everyday business operations. Companies will focus on revenue figures as a way of assessing demand for products and services, However, itis important to look at how this stacks up against net income. A high revenue coupled with a low or negative net income means the company is not managing its costs effectively. Of course, this should be cause for concern to the board, management, shareholders and others, because of its implication for the business sustainability.
• Net income– also known as the Profit after Tax, or bottom line. It is know as the company’s distributable income, because it is the basis for calculating Earnings Per Share from which Dividend is paid by the directors, if any. It is calculated by subtracting total costs from revenue or gross earnings. Investors look at net income to decide whether a company is stable, because consistent profits mean the company is more likely to survive, thrive, and attract future investments.
• Operating expenses is the money a company has spent throughout the quarter in order to make its productsavailable to the final consumer. It includes things like Research & Development, marketing, employee salaries, and director’s fees, among others. 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 that the company is expanding, and confident of 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. It is derived by dividing the PAT by the total number of the company’s issued shares.

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

What Is Are Earnings Calls?

They are conferences held soon after a result is released by a company and it is an opportunity for company management, often the Chief Executive, and/Chief Financial Officer to give background to the performance, the media and analysts. During the call, management will answer questions from those present, as a way of giving more background information on the company’s performance and the outlook, based on recent developments in its sector.

Not all companies give earnings calls in Nigeria. It is however a standard practice in mature markets like the U.S. and Europe, 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 Impact Stock Prices?

Earnings season tend to bring a lot of volatility with it, as there’s a flurry of activities among traders taking 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 at the particular time. Such estimates are usually priced into the market. As such, the only time significant price swings occur is when 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 such company misses analysts predictions, there may be significant downward pressure on its share price. Conversely, better-than-expected earnings may rouse bullish interest.

However, the link between earnings and stock prices is not always so predictable. There are a range of other factors that can impact a stock’s price that market speculators should take into account. Some of them are 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 into researching estimated earnings and analysts expectations, and building a risk management plan.

1. Identify the right stocks

Identifying the right stocks is crucial when preparing to trade earnings season. Now’s probably not the time to choose to trade a company you know nothing about. Instead, you should focus on those 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 such stocks 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 bear-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 risk management planning, 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.