Fundamental Analysis 101: Guide to Reporting Season Analysis

Usually an investor only has a limited amount of time between companies releasing their earnings report and market opening at 10am to assess the outcome of the announcement.

To quickly understand the results of these reports, it is important to take notice of their outlook guidance and specific metrics used. The reader will then further understand the financial health of the business whilst forming an opinion on long-term profitability. From this, strategic decisions can be made.

Fundamental Outlook

Company’s will often release their opinions on the fundamental outlook of the business. This can involve identifying upcoming risks, update on competitor positions, and other forward guidance data that is directly related to the business.

It is important to take note of the language used. Written expression can be compared against previous announcements to provide an indication on change in future sentiment.

Optimism is likely to result in increased revenue in the next reporting season. It is crucial to account for current and future events. Indication of new projects or the signing of a new contract suggests the possibility of increased revenue in the future. Often, updates on projects underway are also mentioned, ensuring stability of future revenue streams.

For example, in 2020 Accent Group announced in their outlook that they will experience gross margin pressure due to FX and competitive environment. This suggests a likely fall in gross margin. On the other hand, Jumbo Interactive Limited reported future licensing agreements, causing upward pressure on revenue.

Whitehaven Coal recently announced no known cases of COVID-19 on any of their sites, whilst coal production was up 17% from the previous corresponding period. This project update is optimistic, suggesting an increase in future revenue. Therefore, viewing the outlook and events of the company is essential when forming investment opinions.

Fundamental Metrics

The three main types of financial statements include the balance sheet, income statement and cash flow statement. The income statement shows how profitable the business is, with revenue being a key metric. Whether profit has increased or decreased provides general future direction.

Other important fundamental metrics include EBITDA, EPS and DPS. They often help forecast how much money will be returned to future shareholders and whether cash is being used effectively.

Understanding the business model will provide an indication of which metrics are more company specific. For example, a retail company will have a strong focus on net sales and inventory balance. This measures efficiency in turning over stock. On the other hand, if looking at a bank the net interest margin is more important to consider as this indicates a bank’s net profit on interest earning assets such as loans.

Alternatively, in the mining industry, it is preferred to look at the amount shipped, price of the product and cost to produce. By looking at these companies specific metrics, a reader can understand the direction of the company within minutes of reading their announcements.

By looking at the fundamental outlook and metrics of a company, the reader can quickly understand the financial health of the business and have an informed opinion of the future direction of the firm.