How Do You Read a Quarterly Report?

All publicly traded companies are required by the Securities and Exchange Commission to file a quarterly financial statement, known as a 10-Q, for the first three fiscal quarters of the year. Now that the first quarter statements are coming out, what do some of the terms reported on the reports mean?

If you’re reading the reports in the newspaper, you probably see a reference to the actual results compared with the analysts’ expectations or forecasts. People who track particular companies for financial firms, for example, are constantly monitoring the performance of that company. As the date for the 10-Q approaches, analysts, often after discussions with the company, predict how much a company will make or lose. And woe to the stock price of a company that does worse than analysts expected.

Quarterly reports will tell you what the company’s net income (also called net profit) or net loss was during the previous three months. This is how much the company earned after deducting all its expenses–everything from salaries to debt payments to purchase of equipment. This is usually expressed as a big lump sum. Earnings are, very generally speaking, the net income divided per share of stock, and that is usually expressed in cents, or if things are really good, dollars. For example, if a company’s quarterly net income was $600,000 and it has 200,000 in common shares, the company’s quarterly earnings would be $3 per share. Gross profit or gross margin is the money the company made in sales minus the direct cost incurred. For example, if a company sells $1 million of widgets in a quarter and it cost $250,000 to actually make the widget, the gross profit is $750,000 for the quarter.

Operating income, or loss, is the money the company makes (or loses) doing its business minus the cost incurred doing that business. This is not necessarily the same as net income. A widget company may be lousy at selling widgets (and who isn’t?) but great at investing in stocks. So the money made–or lost–by widget manufacturing–the operating income–is separated out from the money made from stock investing in order for investors to see how the company does at its core business. That non-operating income is called–surprise!--non-operating income. Both are calculated in the net income. Sometimes you will see that a company has to account for an extraordinary item or a one-time gain or loss. This is something that is not expected to occur in the normal course of business–for example, the Mississippi overflowing and shutting down a factory, or the costs of eliminating an entire division, or a huge profit made by selling investment stocks.

And what about dividends? Dividends are a portion of income paid per share of stock. For example, if a company’s stock is selling at $100 a share and has an annual dividend of $1 per share, the dividend yield is 1 percent. If you’re into technology stocks, you aren’t getting any dividends. Old economy companies like utilities and financial concerns tend to pay dividends; how much is usually decided by the board of directors. New economy companies–which eat up huge amounts of capital–usually invest profits, if there are any–back into themselves.

Next question?

Explainer thanks Diane Garnick of Merrill Lynch.