If you are a business owner, you started your company to be profitable. While you may not have an accounting degree, you should still take the time to understand how to read and analyze all the financial reports for your company. These reports are the barometer by which you can make business decisions, such as whether you need to hire more employees, have the ability to take out a larger loan for equipment, or need to increase or decrease production. One of the most important financial statements for a company is the quarterly financial statement. Understanding how to read and analyze your quarterly financial statements will help you have a practical sense of the financial health of your company.
What is a Quarterly Financial Statement?
Quarterly financial statements, also known as quarterly reports, are a set of financial statements that are issued every quarter (every three months), for a total of four per year. In some cases, the quarterly financial statement is also called the quarterly earnings report. This financial report is made public when appropriate and gives a financial snapshot of a company’s overall financial health and performance. If a company has stock, the quarterly financial statements will likely impact the stock price of the company. In fact, companies are required to have these quarterly financial statements published by law.
The quarterly report for a company will include specific financial reports that show the financial health and growth of a company. Specifically, a quarterly report will include the company’s income statement, balance sheet, and cash flow statement for not only that specific quarter, but also for the year-to-date. Additionally, the quarterly report will also show comparative financial reports for the prior year in order to help show the growth of the company.
Quarterly reports also typically include a discussion section and financial analysis of the growth and financial health of the company. In some cases, the quarterly report may also include risk factors that would impact the value of the company and, if appropriate, a discussion of issues submitted to a shareholder vote during that specific quarter. Any other pertinent financial information will also be included. Quarterly reports are typically filed a few weeks following the quarter. Quarters typically end in March, June, September, and December every year.
Why Does a Quarterly Financial Statement Matter?
Quarterly financial statements help a company owner, as well as any investor potentially interested in investing in the company, understand how a business is financially growing and performing. Quarterly financial statements not only provide a snapshot of the past quarter but can be used to compare against previous quarterly financial statements helping company owners and investors understand and predict the future financial trajectory of the company.
What is Listed in a Quarterly Financial Statement?
The following is a listing of all the different types of items that are listed on a quarterly report, and how they can help develop a full picture of a company’s financial health.
Gross sales are also known as total sales, the “top line,” or revenue. Gross sales are essentially the total of all sales during the specific period, in this case, the quarter. If you see that your gross sales are consistently increasing on your quarterly financial statements, it likely means that your business is financially strong and growing.
If you take your gross sales amount and deduct sales returns, sales allowances, and sales discounts, you will have your net sales. Sales and earnings are important to show that a company continues to sell its product and continues to be profitable.
Every business has costs and expenses associated with running the business. These are called operating expenses and they may include such items as salaries to employees, research and development, supplies, equipment, trademark and intellectual property, legal fees, bank charges, rent or mortgages, parts and components, monthly utility expenses, business licenses, and any other expenses that occur that are a result of operating a business.
Operating profit is the following equation: net sales minus operating expenses equals operating profit. This is also called earnings before interest, tax, depreciation, and amortization (EBITDA). This is a key number for business owners as it directly reflects the expenses and revenue under their control. The operating profit can also reflect how well a business is being managed. It essentially measures the demand for the products or services of a company and the company’s efficiency in delivering those products.
Earnings Per Share (EPS)
Earnings per share is the amount of earnings per outstanding share of a company. Outstanding shares are those shares that are currently trading in the market. If a person looking at a quarterly financial statement of a company divides the net profit by the number of outstanding shares, this will give them the earnings per share. If a company continues to have an increasing EPS, it is considered a healthy and profitable company.
It is important to note that you may find both basic and diluted EPS on a company’s quarterly financial statements. Basic EPS is the total earnings per share based on the number of outstanding shares. However, diluted EPS is the calculation regarding the earnings per share if all the company’s convertible securities were exercised. Unless a company has no additional possible shares outstanding, which is quite rare, the diluted EPS will be lower than the basic EPS.
Additionally, the EPS can also help with the calculations of the price-to-earnings (or P/E) ratio. The P/E ratio measures the price that was paid for a stock in relation to the annual net income earned by the company per share. If there is a high P/E ratio, this should signal that the company will be expecting higher earnings growth in the future. In most cases, the P/E ratio is examined in relation to other companies in the same industry to obtain a relative valuation. If one company has a higher P/E ratio than another company in the same business arena, it would be considered a better buy and likely a more profitable investment.
Interest cost, also known as interest expenses, is the total cumulative sum of all the interest paid on loans held by the company. If the quarterly financial statements show a trend of increasing interest cost, it means that the company continues to increase its debts. While in some cases, increased debt shows a company that is struggling financially, if the increase in debt is accompanied by a rise in sales and profit, it may show that the company is growing overall.
Net profit, also known as net income, is the operating profits minus any loan repayments or taxes owed. Net profit is oftentimes referred to as the “bottom line.” This is critical because it shows the company’s net earnings or losses and can truly illustrate the financial health of the company overall. This is one of the most closely followed numbers in all of finance. This is an actual determination of a company’s success because, at the end of the day, the net profit shows how much profit a company has after all other items have been taken into consideration. Improvement in this number specifically will directly correlate to the improvement of the overall success of a company.
Examination of Quarterly Financial Reports
While the numbers themselves are critical and will specifically indicate the finances of a company, there are some additional areas of a quarterly financial report that should also be examined in the context of not only the standalone quarterly report, but also as a piece of a larger financial puzzle that illustrates the success (or struggles) of the company as a whole.
Many companies will include guidance in their quarterly financial statements, which provides the expected and anticipated results for the next quarter and, in some cases, the entire year. Take the current and past guidance and see if the predictions made by the analysis were accurate. Determining if the actual numbers that occur typically follow the previous management guidance predictions can help you understand if you are able to continue to use this guidance in the future to predict the success and financial health of a company.
Measure Cash Flow
How a company manages its cash flow will help determine how much money is coming in versus how much cash is going out. Seeing how much cash a company spends on a quarterly basis can be an indicator of growth, especially if high amounts of cash are consistently coming into the company.
Examine Accounts Receivable
Accounts receivable is the money earned in a specific quarter but not yet paid by a customer, vendor, or other entity. A company should have accounts receivable grow at approximately the same rate as sales, meaning that the amount they are selling is in direct relationship to the amount of money coming in for those sales over time. However, if sales continue to increase, but accounts receivable stays the same or lowers, there may be a challenge with turning sales into cash and profit at a consistent rate. Companies have a responsibility not only to sell products, but also to collect from customers, as well.
Comparison is Key
At the end of the day, one set of quarterly financial statements may help you understand a snapshot in time of a company’s financial picture. However, true analysis and understanding comes when these quarterly financial reports are compared against each other over time. Quarterly financial reports allow an apples-to-apples comparison of numbers to accurately indicate whether a company is growing or struggling financially over time. There are two different ways to compare quarterly financial statements of a company: quarter-on-quarter (QoQ) and year-on-year (YoY).
Quarter-on-quarter (QoQ) is a comparison of the current quarterly financial statements with the prior quarterly financial statements of a company. This sequential comparison can show the immediate growth that a company has and how they are doing in this small window of time. QoQ comparisons can also show the company’s immediate concerns and struggles, and can be used to determine if the yearly goals will be met.
Year-on-year (YoY) is a comparison of the current quarterly financial statement with the exact same quarterly statement one year ago. This can help determine the overall direction and profitability of a company. This can also assist in evaluating the consistency of the company’s performance over time.
It is important to note that, while a comparison of the quarterly financial statements can give you a solid picture of the financial health of a company, in many cases, if the company is a cyclical company or is in a specific seasonal industry such as building, landscaping, auto, or infrastructure, these numbers must be taken within the context that certain quarters will consistently be high, while others will be consistently low.
Overall Financial Health
If you are a business owner, you should take the time to seriously examine these quarterly financial statements. Over time, the comparison of these quarterly reports against each other will give you a valuable tool by which you will be able to make better business decisions for the success and profitability of your company. The quarterly financial statements, taken in consideration with previous quarterly financial statements, can help a company owner understand the overall financial health of their company. Understanding the financial health of your company can help you make better decisions regarding production, staffing, and decisions related to the growth of your company.
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