Things to look out for in quarterly reports

This week you’ve probably seen an avalanche of quarterly reports flooding the ASX announcement page. We understand that the abundance of information contained in the reports can be overwhelming, especially for novice investors.?

To help you focus on the crucial details and not be distracted by flashy figures, here are some tips and tricks on how to navigate the pages of quarterly reports, and most importantly, pay attention to the things that matter!?

What are quarterly reports?

Quarterly reports, also known as a quarterly, 4C report, or the Appendix 4C, are financial statements that ASX-listed companies release every three months. They show how well the company performed during that period, including its revenues, expenses, profits, and cash flow. These reports help investors evaluate the company’s financial health and make investment decisions. The release of these reports can impact share prices, depending on whether the company meets or disappoints investors’ expectations.

Some companies issue quarterlies, but some don’t. Refer here for more details along with a common timeline of quarterly report releases. Most companies’ reports will appear on the ASX website in the last couple of trading days of the month.

However, if an ASX quarterly report is not lodged to the ASX by the due date, the company is suspended from trading until the report is lodged. Reports from companies who submitted on the deadline may only appear in the first couple of days of the following month.?

Quarterly reports usually include:

(1) A brief activities summary during the period, in the form of an announcement. This usually contains bullet points of some of the most pertinent financial information from the quarter, as well as quotes from the company’s CEO or other top executives.

(2) A cash flow statement summarising investing activities, financing activities, and final cash balance for the quarter.?

It is recommended to look at the cash flow statement before looking at the announcements. If the announcement lacks detailed figures or selectively omits information from the cash flow statement, it can be a concerning indicator.

Things to look out for:

(1) Revenue and Sales Growth: Revenue is NOT required in a 4C report, but some companies might decide to include it in their activities summary and/or commentary (not the cash flow statement). Observing revenue and sales growth is crucial to understand if a company is growing, shrinking, or stagnant. Comparing current reports with past ones and observing organic growth rates helps assess performance.?

Some companies can boost sales through acquisitions or favourable foreign exchange rates, however, organic growth of the core business is a stronger testament of the company’s performance. Look for significant changes in revenue and sales compared to previous quarters or the same period last year.

(2) Cash Flow: An important metric to assess a company’s financial health. It measures all the cash that comes into and flows out of a business. Free cash flow is the cash a company generates after it has paid for its day-to-day expenses, such as rent, payroll and taxes. Positive operating cash flow shows the company is in good shape.?

For unprofitable growth stocks, free cash flow may be a better gauge of financial health than EPS.

(3) Expenses and Costs: Examine the company’s expenses and costs, including operating expenses, cost of goods sold, and any extraordinary expenses that may impact their bottom line. Additionally, compare the company’s expenses to the previous quarter or the same period in the previous year. Look for any significant increase in spending compared to other expenses or past years, and try to find explanations for it in the quarterly report.

Understanding the reasons behind notable expense changes can provide valuable insights into the company’s operations and decision-making.

(4) Available Financing Facilities: This represents a company’s ability to access funds when needed, which include credit lines, loans, and financial arrangements for various purposes like expansion or managing cash flow.?

This helps investors gauge a company’s financial flexibility and growth potential. Ample financing options indicate better preparedness to navigate uncertainties and pursue opportunities, while limited access may hinder growth and increase financial risk.

In addition, companies usually provide a description of each facility above, including the lender, interest rate, maturity date and whether it is secured or unsecured, as well as if any additional financing facilities have been entered into or are proposed to be entered into after quarter end.

(5) Cash Burn and Cash Runway: In the quarterly reporting world, cash runway refers to estimated quarters of funding available until cash runs out, provided the company doesn’t raise any additional funds.

It can be calculated by dividing total available funding with total relevant cash outflow. If the business is spending more than it takes in, it is burning cash. These metrics can be found in section 8 of the 4C report.

If the funding is only sufficient to sustain the next two quarters, companies are required to provide further details and outline any future plans to raise more cash to fund operations.

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Other things to consider…

(1) Accounts Receivables: It is NOT mandatory to include Receivables in a 4C report, but companies have the option to include it in their activities summary (not cash flow statement). These figures represent the balance of money a business will receive for goods and services that have already been delivered to customers but not yet paid for.?

If a company’s accounts receivable and inventories aren’t growing at roughly the same rate as its revenue, this could be a telltale sign that the company is not being efficient at converting its sales into cash. It could also indicate a company’s customers are in financial trouble or the company is being too generous in extending credit or discounts to customers.

(2) Guidance and Future Outlook: Investors often focus on what happened in the last quarter in earnings reports but overlook the strategic plan for the future. It’s crucial to pay attention to any guidance or forward-looking statements from management.?

These insights into their expectations for future performance can show how well the company executes its plan and provide confidence in its long-term ability to deliver results, not just three months at a time.

(3) Sector and Economic Trends: Consider broader sector and economic trends that may have influenced the company’s performance during the quarter.?

For example, when analysing the quarterly report of an eCommerce company with declining earnings, do a little further research to determine if the entire eCommerce industry also experienced a downturn. Check if other eCommerce companies reported the same drop in earnings in their quarterly reports. This broader perspective can help to understand if the decline is specific to the company or a larger industry trend.

(4) Cyclical Trends: Observing the cyclical nature of a business is vital to avoid volatile points. Rather than relying on one quarterly report, analysing year-over-year reports reveals trends and reasons behind fluctuations. Understanding patterns and causes enables more efficient transactions and decision-making processes.

(5) Share Count: A company’s outstanding shares are the total number of shares held by all its shareholders. Factors like stock splits, secondary offerings, and share buybacks can change the outstanding share count. Investors usually avoid stocks with rapidly rising share counts as it dilutes their ownership stakes.