Important things to keep in mind.
Importance of Quarterly Results
Firstly, let us understand the importance of ‘Quarterly Results’.
The shareholders of the company have put their hard-earned money into the company. So, they must know about the affairs of the company. However, they can not have access to the books of accounts of the company. This is because only and only the management of any company can access the books.
Hence, to give a snapshot of a company’s financial performance, listed companies are required to publish ‘Quarterly Results’, which are available in the public domain.
Also, before we start the details, one must have a basic understanding of ‘Financial Year’ and ‘Quarters’.
A financial year normally starts from 1st April and ends on 31st March the following year. This is divided into 4 equal periods, each one is a ‘Quarter’, consisting of 3 months.
Q-1 is a period from 1st April to 30th June,
Q-2 is a period from 1st July to 30th September,
Q-3 is a period from 1st October to 31st December,
Q-4 is a period from 1st January to 31st March.
Also, after 30th September, i.e Q-2, one can get the analysis of half financial year (H- 1). So, H-1 is a period from 1st April to 30th September and H-2 is a period from 1st October to 31st March.
As per SEBI guidelines, every listed company needs to publish quarterly results in 45 days after the quarter-end except the last quarter.
Please note that it is companies that have a custom of uploading the quarterly results as early as possible are the ones that do not have anything to hide or cook. For instance, the entire earnings season starts with giants like Infosys and TCS.
On the other hand, whenever a company delays the quarterly results or postpones them after announcing a date, must trigger caution for an investor. For instance, Yes Bank delayed its quarterly results for the Q-3 of FY 2019–20, which ended on 31st December 2019. It filed the results on March 14, 2020. And we all know of all the major developments that took place before the results.
Also, in past, there have been companies fined by SEBI for not filing the quarterly results altogether. The names include infamous companies like Gitanjali Gems, Amtek Auto, etc.
How to compare results? (Q-O-Q or Y-O-Y)?
For the uninitiated, Q-O-Q stands for Quarter on Quarter and Y-O-Y stands for Year on Year.
When we compare the numbers of a company on a sequential basis, i.e. on Q-O-Q basis, we are comparing Q-2 of the current financial year with Q-1 of the same financial year. Thus, we would be able to judge the performance of a company and make a conclusion if or not it is performing better this quarter compared to the immediately preceding quarter.
On the other hand, on a Y-O-Y basis, we are comparing Q-1 of the current financial year with Q-1 of the last financial year.
So, which comparison is correct? Q-O-Q or Y-O-Y?
The answer depends on the sector to which the company belongs. In the case of cyclical stocks or companies which are seasonal, there may be a quarter where the company performs best compared to other quarters. For instance, in the case of Auto companies, the ‘Diwali’ quarter is the best one. Hence, comparing the numbers on a Y-O-Y basis makes more sense because of a strong second half (H-2). So is the case with Steel, Power, and Cement companies, where Y-O-Y comparisons must be done.
However, in the case of Telecom companies or IT companies, the Q-O-Q comparison makes more sense. The reason is the fact that these companies do not have any seasonality.
Also, YTD (Year to Date) comparisons are quite useful. YTD helps us in analyzing the performance of the company from the start of the financial year till the date quarter. Hence, the YTD numbers for Q-3 will have numbers from 1st April to 31st December.
P.S: The entire year 2020 was an exceptional year due to covid. Hence, in F.Y 2020–21, comparing the numbers on a Y-O-Y basis won’t make any sense as the base is too small.
Impact of quarterly results on stock price
Stock prices more often than not react to the quarterly results of a company. Also, note the below interesting observations :
- Even if there is an increase in profits on Q-O-Q or Y-O-Y basis, the stock can tank because market expectations are an important factor. If the profits are below expectations, the stock will fall.
- Even if the performance of a company is above the expectations of the street, the stock may still fall after the results. This may be because people were anticipating good results and the stock already rallied before the results. That’s why the saying: ‘Buy the rumor, sell the news.
- Sometimes, even after a bad result, the stock may still rally. This may be because of good management commentary. Do note that it is not mandatory for the companies to give guidance or commentary on their plans.
What aspects to focus on?
The following aspects are worth comparing when a company announces quarterly results:
A. ANALYSIS OF PROFIT AND LOSS ACCOUNT
a. The topline of the company (Gross and Net Sales):
- Volume (quantity)
- Price of goods (quality)
b. Operating Income
- EBITDA
- EBIT
c. Margins
d. The bottom line of the company
- Net Profit
- Net Profit Margins
- EPS
B. ANALYSIS OF BALANCE SHEET
- Sources of Funds
- Application of funds
C. ANALYSIS OF CASH FLOW STATEMENT
- Inflow of cash
- Outflow of cash
D. COMMENTS OF THE AUDITOR
E. NOTES
In this post, I will be trying to cover mainly the analysis of profit and loss accounts.
Analysis of Profit and Loss account
1. Topline of the company :
- Gross Sales: Gross sales indicate the total sales of the company before discounts and returns from customers. Gross sales show how the company is performing operationally. It depends on
- Volume: This refers to the total number of units sold. A larger number represents good market penetration.
- Price: Higher price shows that the company is having good command and customer loyalty.
- Net Sales: Net Sales indicates the sales of the company after discounts and returns.
2. Operating Income and Net Profit:
- To understand the entire concept of operating income, let us understand this example in detail.
- EBITDA or Earnings before interest, tax, depreciation, and amortization help one to understand how the company is going through its regular business activities, i.e. its operations.
- Please note that in EBITDA numbers, we have not deducted interest on borrowings, depreciation on assets, and amortization on intangibles like goodwill. This is because different companies from the same sector may have different amounts and dates of buying fixed assets, different finance structures, etc. Hence, EBITDA numbers help one to compare the numbers with peers for understanding the financial performance of the company.
- EBTDA margin, in this case, are 60%. It is calculated by dividing EBITDA by Sales. Again this is useful for comparing with peers.
- EBIT is calculated by subtracting depreciation from EBITDA. Further, one can calculate PBT by deducting interest from EBIT. And finally, Net Profit (PAT) is arrived at by deducting tax from PBT.
- Net Profit helps one to understand the individual performance of a company. This can again be compared on Q-O-Q or Y-O-Y basis as discussed previously. This is nothing but the bottom line of the company.
- Note: Sometimes company may earn revenue which is not from operations, such as rental income or income from investments. These numbers must be ignored when we focus on operating profits.
3. Margins
- In the above case, the net profit margin comes to 35%. It is calculated as Net Profits divided by Sales.
- Net Profit margin gives an idea of the overall financial position of the company and how well the company has managed to contain the costs. Also, if the net profit margins of a company are fluctuating then investors must look for the reasons such as one-off income or expenses.
4. EPS
- EPS is Earnings Per Share. It is calculated as the Net Profit of the company divided by the total number of outstanding shares.
- It helps investors in knowing how much a company earns for every share.
- Also, if we multiply EPS by PE ratio we get the Market Price per share. For understanding the PE ratio, one may refer to this post: Apples, Oranges, And P/E Ratio.