After every three months, companies are required to report its financial performance. Most Indian companies listed on the stock exchanges do so in a particular month. This is called the earnings season.
Typically, IT services exporter Infosys kicks off the season among top companies. During this time, you will read a lot of jargon used to explain how the business has performed.
Here are seven major terms to know:
• Profit growth: Performance is measured by comparing over a period of time. In the case of companies, its profits are its biggest assets. The net profit is compared from that in the previous quarter. The change in the amount gives the sequential growth in profits. It can also be calculated on year-on-year (YoY) basis.
It is always reported in percentage format. It can also be calculated by the change in profit after tax (PAT). According to a report by Motilal Oswal, a brokerage firm, the net profit of 159 companies it monitors is expected to grow 6% on an average in FY14. Growth is expected to be dragged down by the banking sector, which may witness a 3% fall in profits.
• Revenue growth: Companies earn money by selling goods and services. This is called revenues. The growth in revenue is a key metric since the profitability of a company is dependent on its ability to increase revenue by selling by goods or services.
Generally, the quarter ending December witnesses an improvement in sales growth of companies. This is because festivals like Diwali and Christmas fall in the time period, and consumers tend to spend more on consumer goods, real estate and auto products.
• Operating profit: A significant cost for companies is the tax they pay. But, analysts like to know the actual difference between total income and expenditure. This is called operating profit. Many analysts also use earnings before interest, taxation, depreciation and amortization (EBITDA) as operating profit.
A rising operating profit means the company is run efficiently. A fall in the number can mean that the company is finding it difficult to generate revenue. It is an important term for manufacturing or IT services companies.
• Profit margin: During tough economic environments, analysts often say that companies feel a squeeze in profit margins. A rise in revenue does not result in a corresponding increase in profits. This is because costs could also have increased. For this reason, analysts look at the profit margin. The net profit as a percentage of total sales is useful.
A related metric is the operating profit margin, which is the ratio of EBITDA and total sales, when reported as a percentage. This indicates the company’s efficiency in generating revenue. Manufacturing or IT services companies are closely monitored for their operating performance.
• Earnings per share (EPS): This is the company’s net profit divided by the total number of its equity shares. It helps give perspective on the company’s stock price. Analysts usually predict the future EPS and suggest a target price for a company.
The Infosys shares gained ground on Friday due to better prospects for its future EPS and not the present performance.
• Guidance: Some companies give guidance about the performance in the near future. Infosys, one of India’s biggest IT companies, gives a guidance for the profit and revenue expected for the full year along with the factors than can affect it. This helps investors and analysts forecast future profit expectations.
• Management commentary: Typically, after results announcement, management of companies are interviewed by the media. Various questions are asked about the quarter gone by and the quarters to come. This helps investors and analysts understand the business strategy applied by companies, which eventually affects its future performance. Sometimes, companies also directly speak to brokerage houses.
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