It's the time of the year again, that comes 4 times a year actually, when companies report their quarterly earnings. You may hear on the news that X company reported their earnings and therefore their stock price dropped/raised. If a company reports good earnings at their goal or above then their stock price usually goes up and if not...
So what goes into a company's earnings? This is important to know just to understand the economy and the cycle of consumers and businesses.
There are three main statements that companies provide every quarter. The Income Statement, the Balance Sheet, and the Statement of Cash Flows.
We will focus on the Income Statement for right now since it is the easiest to understand and a good indicator of how a company is performing.
On a basic level a company will have Revenue. This can be earned based on selling goods or providing some service. Followed by Revenue on the statement is Cost Revenue. This is the costs the company incurred while trying to sell their goods and services. These two are the main components of the Income Statement. Here is an example of Under Armour's quarterly income statements:
This was pulled from the investor section of their website so when they actually file these documents they may not look as pretty. You can see that a company will start with Revenue and then Cost of Revenue and work their way down the list with all the different expenses they had for the quarter.
Here are some other important terms:
Selling, General, and Administrative Expenses (SG&A) - These expenses include salaries, office supplies, and anything that generally keeps the business running but is not related to the actual product or service
Research and Development (R&D) - This expense pertains when companies are spending money to research new products. In the case of Under Armour this is most likely funds used to research new materials for their sports gear.
Depreciation and Amortization - Depreciation is how you calculate the decrease in value of a tangible piece of equipment over time. For example, a machine in a factory is not worth $15,000 a year from now because it has been used and therefore decreased in value. You could say the machine has a useful life of 5 years and therefore depreciates at $3,000 a year.
All of these and some other small accounts are subtracted from Revenue and create a line item for Earnings Before Interest and Tax (EBIT). This is also known as Operating Income of the income generated just from daily operations.
You then subtract out interest and taxes and get Net Income. This tells you how much the company actually made after all expenses.
As you can see in the case of Under Armour their Net Income last quarter was -$12.3 Million. When Under Armour reported this their stock price dropped.
Understanding how companies operate will help you understand the economy. As well, it can help you run your own business if you have an entrepreneurial spirit.
Alright, now shop my latest look!