Reading Earnings Reports

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What You’ll Learn

1. ✅ Understand what earnings reports are and when they’re released
2. ✅ Navigate the key sections of a 10-Q and 10-K filing
3. ✅ Read and interpret an income statement, balance sheet, and cash flow statement
4. ✅ Identify red flags and positive signs in earnings reports
5. ✅ Listen to earnings calls and extract key insights
6. ✅ Use Money Monty to analyze complex financial data quickly
7. ✅ Make informed investment decisions based on earnings

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What are Earnings Reports?

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The Basics

• Filed every 3 months (Q1, Q2, Q3)
• ~20-50 pages
• Not fully audited
• Quick snapshot of quarterly performance

• Filed once per year (after Q4)
• ~100-300 pages
• Fully audited
• Comprehensive view of entire year + business description

• Companies have 45 days after quarter-end to file 10-Q
• Companies have 90 days after year-end to file 10-K
• Most companies release within 30-60 days

• Jan-Feb (Q4/annual results)
• Apr-May (Q1 results)
• Jul-Aug (Q2 results)
• Oct-Nov (Q3 results)

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Why Read Earnings Reports?

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Reason #1: Get the Truth (Not the Hype)

• “Apple beats earnings expectations!”
• “Amazon misses revenue targets!”

• Headlines are oversimplified
• Missing context and nuance
• Often focusing on one metric

• Complete financial picture
• Context behind the numbers
• Management’s explanation
• Forward-looking guidance

• Miss was due to one-time factory shutdown (temporary)
• Revenue still up 40% year-over-year
• Gross margins improving (positive trend)
• Guidance raised for next quarter

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Reason #2: Spot Red Flags Early

• Reported strong earnings
• Stock at all-time highs
• But: 10-K showed massive off-balance-sheet debt
• Result: Investors who read it sold early, avoided 99% loss

• Reported “adjusted” earnings (looked good)
• But: 10-K showed deteriorating cash flow
• Red flag: “Adjusted earnings” ≠ actual cash
• Result: Stock crashed 60% over next year

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Reason #3: Find Hidden Opportunities

• Boring industry (nobody pays attention)
• Growing revenue 25%/year (10-K shows it)
• Expanding profit margins (getting more efficient)
• Trading at P/E of 12 (cheap!)

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The Three Financial Statements

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1. Income Statement (P&L - Profit & Loss)

• Total money from selling products/services
• Look for: Growing revenue year-over-year (YoY)

• Direct costs to produce products
• Look for: COGS growing slower than revenue (good!)

• Revenue - COGS
• Gross Profit Margin = Gross Profit / Revenue
• Look for: Margins improving over time

• Sales & marketing, R&D, general & administrative (G&A)
• Look for: These growing slower than revenue

• Gross Profit - Operating Expenses
• Operating Margin = Operating Income / Revenue
• Look for: Positive and growing

• The bottom line (after taxes, interest, etc.)
• Net Profit Margin = Net Income / Revenue
• Look for: Positive and growing

Revenue:                   $119.6 billion
Cost of Goods Sold:        $68.3 billion
--------------------------------
Gross Profit:              $51.3 billion (42.9% margin)

Operating Expenses:        $14.8 billion
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Operating Income:          $36.5 billion (30.5% margin)

Taxes:                     $6.1 billion
Interest/Other:            $0.3 billion
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Net Income:                $30.1 billion (25.2% margin)

• ✅ Revenue up 2% YoY (steady growth)
• ✅ Gross margin 42.9% (strong pricing power)
• ✅ Operating margin 30.5% (efficient operations)
• ✅ Net margin 25.2% (highly profitable)

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2. Balance Sheet

• Cash & equivalents
• Accounts receivable (money owed by customers)
• Inventory

• Property, plant, equipment (PP&E)
• Intangible assets (patents, trademarks)
• Investments

• Accounts payable (money owed to suppliers)
• Short-term debt

• Long-term debt
• Deferred revenue
• Pension obligations

• Common stock
• Retained earnings
• Equity = Assets - Liabilities

ASSETS:
  Cash:                    $111 billion
  Accounts Receivable:     $48 billion
  Inventory:               $3 billion
  PP&E:                    $95 billion
  Goodwill/Intangibles:    $180 billion
  --------------------------------
  Total Assets:            $512 billion

LIABILITIES:
  Accounts Payable:        $25 billion
  Short-term Debt:         $9 billion
  Long-term Debt:          $58 billion
  Other Liabilities:       $110 billion
  --------------------------------
  Total Liabilities:       $202 billion

EQUITY:                    $310 billion

• ✅ $111B cash (strong liquidity)
• ✅ Debt: $67B total ($58B long-term + $9B short-term)
• ✅ Debt-to-Equity: $67B /$310B = 0.22 (very low, safe)
• ✅ Current Ratio: Current Assets / Current Liabilities = 2.5× (healthy)

= Total Debt / Total Equity
< 0.5 = Very safe
0.5-1.0 = Moderate
> 2.0 = Risky

= Current Assets / Current Liabilities
> 2.0 = Very healthy
1.0-2.0 = Adequate
< 1.0 = Liquidity concerns

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3. Cash Flow Statement

• Companies can manipulate earnings (accounting tricks)
• Cash is harder to fake
• Cash is what pays dividends, debt, and funds growth

• Cash from core business operations
• Look for: Positive and growing
• Should be > Net Income (high quality earnings)

• Cash spent on growth (buying assets, R&D, acquisitions)
• Usually negative (companies investing for future)

• Cash from/to investors (debt, equity, dividends, buybacks)
• Negative = paying dividends/buybacks (good!)
• Positive = raising debt/equity (need cash, could be concerning)

Operating Cash Flow:       $84 billion (from operations)
Investing Cash Flow:       -$59 billion (buying warehouses, tech)
Financing Cash Flow:       -$18 billion (paying debt)
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Net Change in Cash:        +$7 billion

• ✅ $84B operating cash flow (strong core business)
• ✅ Investing heavily ($59B) in growth
• ✅ Paying down debt ($18B) - financially prudent
• ✅ Net cash increased (healthy)

= Operating Cash Flow - Capital Expenditures
= Cash available after maintaining/growing business

• Operating Cash Flow: $84B
• CapEx (from investing section): $55B
• Free Cash Flow: $84B -$55B = $29B

• Pay dividends
• Buy back stock
• Pay down debt
• Acquire other companies
• Save for rainy day

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Where to Find Earnings Reports

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Method #1: SEC EDGAR (Official Source)

1. Go to sec.gov/edgar/searchedgar/companysearch
2. Enter company name or ticker (e.g., “Apple” or “AAPL”)
3. Click search
4. Look for “10-Q” (quarterly) or “10-K” (annual)
5. Click on most recent filing
6. Download PDF or view HTML

• Official source (100% accurate)
• Free
• Historical filings available (10+ years back)

• Interface is clunky
• Hard to compare quarters side-by-side

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Method #2: Company Investor Relations

• Apple: investor.apple.com
• Microsoft: microsoft.com/investor
• Tesla: ir.tesla.com

• Latest earnings reports (nicely formatted)
• Earnings call transcripts
• Earnings call audio/video
• Investor presentations
• Press releases

• Easy to navigate
• Formatted for readability
• Includes supplementary materials

• Company’s own spin (may highlight positives, downplay negatives)

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Method #3: Financial Data Platforms

1. Search ticker
2. Click “Financials” tab
3. View Income Statement, Balance Sheet, Cash Flow
4. Data auto-extracted from 10-Ks/10-Qs

• Earnings transcripts (free)
• Analyst commentary
• Community discussion

• Visual charting of financial data
• Compare quarters easily

• Quick access
• Easy comparison
• Visualizations

• Sometimes data entry errors
• Missing context from full report

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How to Read a 10-K / 10-Q Efficiently

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The 30-Minute Speed Read Method

• What does the company do?
• Who are their customers?
• What are their revenue sources?
• Who are their competitors?

• What could go wrong?
• Regulatory risks?
• Competition risks?
• Economic risks?

• Management’s explanation of results
• Why revenue up/down?
• Why margins changed?
• Forward-looking commentary

• Income Statement
• Balance Sheet
• Cash Flow Statement
• Focus on trends (QoQ and YoY comparisons)

• Accounting policies
• Debt details
• Share-based compensation
• Segment breakdown

• Changes in accounting methods (red flag if unexplained)
• Large one-time charges
• Contingent liabilities

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What to Look For (The Checklist)

• Revenue growing 10%+ YoY (or industry-appropriate rate)
• Organic growth (not just from acquisitions)
• Multiple product lines growing (not reliant on one)

• Gross margins stable or expanding
• Operating margins stable or expanding
• Net income growing faster than revenue (operating leverage)

• Operating cash flow > Net Income (high quality earnings)
• Free cash flow growing
• Cash flow from operations covers capital expenditures

• Debt-to-equity < 1.0 (or industry-appropriate)
• Cash > Short-term debt (no liquidity concerns)
• Working capital positive and growing

• Management raised guidance (bullish!)
• Conservative estimate likely to be beaten

• Revenue declining or flat
• Revenue growing but margins shrinking (pricing pressure)
• Revenue from acquisitions only (not organic)

• Negative net income (losses)
• Margins compressing (costs rising faster than revenue)
• One-time charges every quarter (not really “one-time”!)

• Operating cash flow < Net Income (earnings quality issue)
• Negative free cash flow
• Cash flow from operations declining while revenue grows

• Debt-to-equity > 2.0 (high leverage)
• Short-term debt > Cash (liquidity crisis risk)
• Rapidly increasing accounts receivable (customers not paying?)

• Frequent restatements of prior period results
• Changes in revenue recognition policies
• “Non-GAAP” or “Adjusted” earnings wildly different from GAAP
• Large discrepancy between earnings and cash flow

• Lowered guidance (bearish)
• Vague, evasive answers on earnings call
• Heavy insider selling after earnings release
• Auditor change (especially to lesser-known firm)

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Using Money Monty to Analyze Earnings Reports

Hey Money Monty, I want to analyze [COMPANY]'s latest earnings report (Q[X] 20XX).

Can you provide:

1. REVENUE ANALYSIS:
   - Total revenue and YoY growth %
   - Breakdown by segment (if available)
   - Organic vs. acquisition-driven growth

2. PROFITABILITY:
   - Gross margin, operating margin, net margin
   - Comparison to prior quarter and prior year
   - Are margins expanding or contracting?

3. CASH FLOW:
   - Operating cash flow
   - Free cash flow
   - Cash flow vs. net income (quality of earnings)

4. BALANCE SHEET HEALTH:
   - Total debt and debt-to-equity ratio
   - Cash position
   - Any concerns about liquidity?

5. KEY METRICS:
   - Industry-specific KPIs (e.g., users for tech, same-store sales for retail)
   - Trends over last 4 quarters

6. MANAGEMENT COMMENTARY:
   - What did management say about the quarter?
   - Guidance for next quarter/year?
   - Any notable risks mentioned?

7. RED FLAGS:
   - Any accounting concerns?
   - Unexpected charges or write-downs?
   - Management credibility issues?

8. OVERALL ASSESSMENT:
   - Beat, meet, or miss expectations?
   - Bullish, neutral, or bearish on the stock?
   - Key takeaways for investors

Summarize in a clear, concise report I can read in 5 minutes.

• Read the full 10-K/10-Q for you
• Extract key data
• Highlight trends
• Flag concerns
• Provide investment perspective

Hey Money Monty, [COMPANY] just reported Q2 earnings. Their revenue grew 15%, but the stock dropped 10% after earnings.

Why did the stock drop despite strong revenue growth? What did I miss?

Check:
- Guidance (was it lowered?)
- Profit margins (did they compress?)
- Key metrics (users, retention, etc.)
- Management tone (any concerns raised?)

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Listening to Earnings Calls

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What is an Earnings Call?

• CEO & CFO present results
• Analysts ask questions
• Typically 60 minutes

• Company investor relations website
• Seeking Alpha (transcripts)
• YouTube (some companies livestream)

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How to Listen Effectively

• CEO discusses business highlights
• CFO walks through financial results
• Management provides guidance

• Tone (confident vs. defensive)
• Focus areas (what they emphasize)
• Buzzwords to avoid complexity

• Analysts ask tough questions
• Management responds

• How management handles tough questions
• Any evasiveness or vagueness
• Unexpected revelations

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Red Flags in Earnings Calls

• “We don’t break out that metric”
• “We’ll get back to you on that”
• “I can’t comment on that at this time”

• “The macro environment…”
• “Supply chain issues…”
• “Currency headwinds…”

• “Adjusted EBITDA” (excluding ‘one-time’ costs)
• “Non-GAAP earnings” (excluding stock-based comp)

• CEO should lead on business strategy
• CFO heavy call = CEO not engaged?

• “We’re being prudent”
• “Out of abundance of caution”

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Green Flags in Earnings Calls

• Answers questions clearly
• Provides specific data
• Acknowledges challenges without excuses

• Confident in future performance
• Seeing strong trends

• “Executives are buying stock”
• “Board approved new buyback”

• Growth catalysts
• Expanding TAM (total addressable market)

• Analysts upgrading ratings
• Positive questions (not skeptical)

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Putting It All Together: Complete Example

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Example: Analyzing Apple’s Q1 2024 Earnings

• $119.6B (up 2% YoY)
• iPhone: $69.7B (flat)
• Services: $23.1B (up 11%)
• Mac: $7.8B (down 11%)
• iPad: $7.0B (down 25%)
• Wearables: $12.0B (up 2%)

• Gross margin: 42.9% (down from 43.0%)
• Operating margin: 30.5% (down from 31.2%)
• Net income: $30.1B (down 2%)

• Operating cash flow: $34.4B
• Free cash flow: $29.2B
• FCF > Net Income ✅ (quality earnings)

• Cash: $166B
• Debt: $111B
• Net cash: $55B ✅ (strong position)

• iPhone revenue flat due to difficult YoY comp (Q1 2023 was huge)
• Services growing strongly (recurring revenue)
• Wearables (Apple Watch, AirPods) growing steadily
• Mac/iPad weak due to tough macro for consumer electronics

• Expect “low single-digit” revenue growth next quarter
• Services to continue growing double-digits

• Highlighted installed base of 2.2 billion devices (all-time high)
• Vision Pro (new product) launching soon
• Confident in long-term growth

• Margins pressured by currency headwinds (strong dollar)
• Expect margins to improve as currency stabilizes

• Analysts asked about China weakness (competition from Huawei)
• Cook acknowledged competition but confident in differentiation
• Buyback program continues ($90B authorized)

• ✅ Strong cash flow ($29B FCF)
• ✅ Services growing 11% (high-margin, recurring)
• ✅ Installed base at all-time high (future services growth)
• ✅ Massive buyback ($90B)
• ✅ Net cash position ($55B)

• ❌ iPhone revenue flat (core product stalling)
• ❌ Mac/iPad down significantly (weak consumer demand)
• ❌ Margins compressing slightly
• ❌ China weakness (geopolitical risk)

• Hold/Buy on dips
• Core business stable (not declining)
• Services growth offsets hardware weakness
• Strong capital returns (buybacks)
• Valuation reasonable (P/E ~28, not cheap but not expensive)

• iPhone cycle (when does next super-cycle happen?)
• China regulatory/competition risks
• Margin compression if continues

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Success Checklist

• Understood what 10-K and 10-Q filings are
• Located earnings reports on SEC EDGAR and company IR sites
• Read and interpreted an income statement
• Analyzed a balance sheet for financial health
• Evaluated a cash flow statement for cash generation
• Identified at least 3 red flags and 3 green flags
• Found and listened to an earnings call (or read transcript)
• Used Money to analyze an earnings report
• Completed a full earnings analysis for a company you’re considering
• Made an informed buy/hold/sell decision based on earnings

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What’s Next?

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Related Workflows:

• [Understanding Stock Fundamentals](<../../Pre-Investor/Getting Started/understanding-assets.md>) - Apply earnings analysis
• Value Investing with Sage - Find undervalued companies
• Growth Stock Selection - Analyze growth metrics
• Monthly Portfolio Review - Track earnings for your holdings

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Continue Learning:

• Read 10-Ks for companies you own (quarterly discipline)
• Follow earnings season closely (learn from multiple companies)
• Join Seeking Alpha (read analyst commentary)
• Take accounting course (Coursera, Udemy) for deeper understanding

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Practice:

• This week: Read one 10-K start to finish (pick a company you know)
• This month: Listen to 3 earnings calls (observe patterns)
• This quarter: Analyze all earnings for your portfolio holdings
• Ongoing: Read earnings reports before buying any stock