What should you look for in a Company’s Earnings’ Scorecard?

It’s raining numbers with most companies reporting their quarterly and annual financial results. By now some bigwigs like SBI, ICICI Bank, Infosys, TCS, Tata Steel have reported their quarterly and annual earnings. 

It is mandatory for every listed company to disclose their financial results within 45 days of the end of a quarter. At the end of the financial year, a company declares its quarterly as well as its annual financial earnings. 

What do these numbers mean?

You can analyse a company by looking at the earnings scorecard, which is announced at the end of every three months, called a quarter in the financial jargon.

However, these jargons such as Net profit, Net Interest Income (NII), net interest margin (NIM), operating expenses etc can be daunting for a novice investor. 

But these numbers help you understand if the company’s core business is in place, which also gives you an idea if it is worth investing or holding on to the company’s stock. That’s the reason why stock price spurts or plunges following the announcement of the results.

If groping of these financial parameters is not your cup of tea, here is a simpler way out. 

1) Company Action 
Sales, revenue and net profit of a company gives you a bird’s eye view of the financial health of a company. This gives you an idea of how much a company is earning and whether it is on the right growth track. However, if a financially sound or a blue chip company’s net profit or sales shrink, you should look beyond its numbers.  Check if there has been a negative trigger in the company itself or the sector as a whole, which could have dented the company’s financials. 

2) Comparison with Peers

IT Companies such as TCS, HCL and Congizant have reported impressive earnings as compared to their peers such as Infosys and Wipro, despite sluggish growth in IT sectors. 

According to some media reports, a research firm called Gartner mentioned that aggressive sales and marketing helped TCS, HCL Technologies and Cognizant post stronger growth numbers than their peers. Hence even as the sector as a whole may have seen a dull year in terms of earnings, a change in business mix can aid a company outperform its peers.

3) Scan the Big Picture 

SBI’s net profit for the January-March quarter of 2013 dipped 18.5%. But you can’t look at these numbers in isolation. Most public sector banks including SBI have seen a dip in their earnings because of higher provisioning of bad loans. Provisioning means keeping a certain amount of money against a portfolio like a safe deposit. RBI recently hiked the provisioning requirement for restructured/bad loans to 5% from 2.75%, which dented the bank earnings. However, this has impacted the entire banking sector this quarter, which may not be the case in the upcoming quarter. Hence always get the Big Picture right by scanning the financials of the entire sector than just a single company. You can get a low down on the entire sector if you look at the performance of the 3 large companies.