4 indicators worth watching in quarterly earnings reports

Earnings Reports Icon

Four times a year, a downpour of quarterly earnings reports drops from the executive boards and financial offices of public companies around the country.

So, grab an umbrella, because the latest storm has started.

Earnings reports announce the revenue, income, and profit or losses of publicly held companies. The companies are obligated to issue them quarterly to current and potential investors and as a 10-Q filing with the Securities and Exchange Commission, the federal agency responsible for enforcing federal securities laws. Second-quarter summaries for the three-month period ending June 30 are going out from tens of thousands of companies right now.

Most of those will contain good news as the Dow, Nasdaq, and S&P have reported consistent gains over the past month, fears of a big Brexit backlash are subsiding, and prospects for the next business quarter are guardedly optimistic – November’s general election outcome notwithstanding.

But finding the important information in a quarterly report amid line after line of corporate vernacular can be dizzying. Having tackled these reports from two sides – first as a newspaper journalist, then at the corporate level – I can tell you that some of the mystery can be difficult for even experienced eyes to unravel. In some instances, only the reports’ authors have the clearest sense of what’s written. That’s because these people must put polish on what could be a dull or dreary three months, while still meeting an obligation to set the record straight.

You can strain your patience and eyesight pouring through these documents. So, skip past the disorienting argot to focus on these key performance indicators:

Cash flow – As in “free cash flow,” or the cash generated from operations minus capital expenditures and dividend payments. This is distinct from EBITDA – earnings before interest, taxes, depreciation, and amortization – which often appears in the bottom third of the report. From a company’s standpoint, EBITDA is fascinating reading, but the real news lies in the cash flow. If it’s positive, that’s a good sign the company can cover its debts and operating expenses.

Earnings per share, net income, and revenue – Combined, these reflect the overall financial health of a company. The EPS reflects how much of a company’s profit is allocated to each outstanding share of stock, net income reflects total earnings, and revenue refers to total earnings from normal business activities. Of course, positive numbers are preferred, but it’s telling whether these numbers fluctuate widely between quarters. The gap between these numbers attests to variations in the …

Margins – These show how much out of every dollar a company keeps. In formula form, two of the most important ones look like this:

  • Gross profit margin = (Sales – Cost of goods sold) / Sales
  • Operating profit margin = Earnings before interest and taxes (EBIT) / Sales

Size matters for both. If the gross margin is high, a company has extra cash to spend on product development and building the business. Rapid decreases from one quarter to the next, caused by such things as higher labor or material costs, may indicate trouble, which the company can mitigate by raising its prices. As for operating profits, a decrease here suggests the company is struggling to control costs.

Earnings per share vs. expectations – Earnings reports reveal not just how a company performed the previous business quarter. Corporate leadership also devotes space to prospects for the next quarter and punctuates them with a quote or comment usually from the chief executive officer or top financial officer. These prospects shape market and media expectations. If the expectations fall short, the company needs to explain why. A deal closing late or a missed order delivery rarely warrant concern. But revenues that buckle under the weight of changing trends, technology, lawsuits, market turmoil, or new technology can prompt investors to scamper away.

Smoking clouds your financial judgment, researchers find

Smoking was once a major part of my life even though I never lit up.

My parents did, however, and often. So often that I remember clearly how long, brown nicotine streaks stretched down our bathroom walls after each steamy shower; how the burn marks on our furniture multiplied until my mother figured how to hide them with throws and pillows – until those were burned through, too; how the school dean once told me to change clothes because they smelled strong of second-hand smoke.

You’d think all that exposure would carve a similar habit into my behavior; after all, we tend to pick up many of the same habits our parents do. Instead, the constant exposure to cigarettes and their noxious or ashy effluent did just the opposite; I grew up repelled by cigarette smoke and tended to steer clear of its sources.

Over time, however, I wasn’t the one who modified my behavior to meet social demands; the marketplace did. Smoking’s cachet fell away, driven largely by repeated health warnings, to be replaced with a stigma that attached to it like barnacles and pushed persistent smokers outside and away from workplace centers of decision-making.

Now, add a new discouragement to smoking: Research led by the University of Wisconsin-Milwaukee says habitual smokers tend to make worse decisions regarding their personal finances than people who smoke infrequently or not at all.

The research, buttressed by other economic analysis of smokers and led by Scott Adams, a professor of economics at UWM, surveyed more than 1,000 smokers over a two-year period and found that people who retreat into a cigarette break seeking instant gratification are likely to bridle when their attempts at fiscal gratification do not similarly yield immediate benefits.

The outcomes are reflected in credit scores, Adams says. Among the economic analyses, 41 percent of smokers were denied credit, 30 percent routinely missed credit card payments, and 27 percent had filed at least once for bankruptcy. Across the board, these percentages were twice as high as those for non-smokers. (These experiences were common among the survey group.)

In general, smokers accept the risk of poor health to pursue their habit, Adams stipulated. That risk-taking can be considered reflective of an overall willingness to take chances – an appealing quality in business.

But risking a smoke is met with the immediate gratification nicotine provides. Rewards gleaned from taking financial risks are neither readily apparent nor readily available, and hurrying toward those perceived rewards tends toward recklessness, Adams said.

“(A) smoking habit has an important and independent ability to predict behavior even after we control for variables that might be considered the true source of the poor performance in personal finances,” he wrote. “… We find that there is residual information in smoking status that can help predict credit score, and the size of this residual information is substantial.”

Adams acknowledges that other factors not measured by this study may clarify the relationship between smoking and personal finance but gave no indication that his research group would investigate them.

3 reasons to avoid copying TV reporter’s F-word rant

GIF of Charlo Greene

Courtesy of PerezHilton.com

Until last Sunday, few people outside Anchorage, Alaska’s TV news audience knew of KTVA-TV reporter Charlo Greene.

She changed that in one second on a live broadcast and became a prime example of what not to do when leaving an employer.

In signing off from the CBS affiliate on Sept. 21, Greene acknowledged playing a key role in the story she was reporting on medical marijuana and announced that she was switching allegiance from journalism to the cause of legalizing marijuana use in Alaska by telling viewers “As for this job, well … f**k it. I quit.” She then walked off camera to leave a stunned news anchor stumble through damage control.

From Anchorage to Albany, N.Y., the Web went wild over Greene, known off-screen as Charlene Egbe. Links to her flameout appeared on hundreds of sites. A YouTube clip of it posted by the Alaska Dispatch News had 12 million hits by the following Thursday.

She did what many people dream of doing.

But the backstory makes her cavalier farewell far from heroic or enviable. Greene had opened her own medical marijuana dispensary in the months before producing a five-part news report for the station on Alaska’s legalization initiative. She also had legal trouble related to her advocacy. KTVA’s news director said in a public statement that Greene never disclosed her conflict of interest to the station.

The station has reason to be embarrassed, but so too does Greene. The Dispatch News reports that advocates for the initiative found fault with her reporting and that Greene says she went rogue mainly to reverse waning support for the legalization movement.

In a post-meltdown interview with Vice.com, Green ended with this:

“If you’re going to quit your job, do it big. Why not? Your job probably sucks, so go ahead and get whatever you can out of it.”

Sage advice perhaps for inconsiderate nonconformists but toxic for everyone else. A truly effective workplace exit impresses both ex-employers and potential employers and preserves the shine on one’s own reputation.

By leaving KTVA the way she did, Greene badly bruised herself and the people around her in three ways:

By using vulgar language — We hear the F-word all the time in music, movies and casual conversation, but a stigma sticks to it in most professional and public venues, and usage is discouraged in workplaces, schools and stores. Greene demonstrated how the centuries-old F-word still cuts through our social sensibilities. However, the F-word is a one-trick pony; the second use lands a weaker punch than the first, and continued usage implies the user has a limited vocabulary — which undercuts anyone who works in communications.

By being unethical — Green apparently continued acting like a journalist even though in her mind she stopped being one. She told Vice.com that KTVA gave her a platform “to draw attention to the (marijuana legalization) issue” and hinted that her outburst formed sometime between Sunday and April 20, the date Greene says the advocacy group she heads received its business license. The Society of Professional Journalists’ Code of Ethics says, “Avoid conflicts of interest, real or perceived. Disclose unavoidable conflicts.” When professional ethics waft out the window with the pot smoke, credibility in all things likely follows.

By harming others — Greene obviously had her own interests in mind when she paraded her petulance. She neglected to consider, or was indifferent to, the impact of her actions on others, and that could rebound in her face. The Federal Communications Commission has levied fines on broadcasters who permitted even accidental on-air uttering of F-words. KTVA is apologetic; still, accusations by supporters of the initiative that Greene let bias and inaccuracy seep into her reporting have raised questions about why KTVA considers Greene’s activities surprising. Meanwhile, marijuana-use advocates in Alaska and Colorado say Greene’s profane exhibition potentially weakens their efforts to advance the issue with maturity.

Had Greene remained professional and objective, KTVA lacked a reason to probe her work behavior or her privacy. Digging too deeply amid the latter risked violating her civil rights. Personal responsibility, not an employer, determines an individual’s credibility.

Andy Warhol once said, “In the future, everyone will be world-famous for 15 minutes.” This week, Charlo Greene received quite a bit more attention than that. Next week, nobody will take her seriously for even half as long.