Reading an earnings report

What this is about

Four times a year a company reports, and the share often moves sharply within minutes. Understanding why that happens — and why the direction so often surprises people — is the practical end of this chapter.

Worked example: Northwind Components, fictional, reporting Q3.

The move is about expectations, not results

This is the whole lesson, and almost everything else follows from it.

The price before the report already contains what the market expects. So the report cannot move the price by being good. It moves the price by being different from what was expected.

Northwind Q3
                        Expected      Reported
Revenue                    152m          158m     +3.9%
EPS                       £0.38         £0.41     +7.9%

A clear beat on both. And the share can still fall — which is where most of the confusion in the next hour comes from.

Why a beat can fall

Guidance. Companies usually say something about the coming quarter or year. Guidance is about the future; results are about the past, and the market prices the future. A strong quarter with lowered guidance frequently falls, and the headline "beats expectations" will be accurate the whole way down.

The whisper. Published consensus is not the only expectation. When a share has run up 20% into results, the market is positioned for something better than the published number, and merely beating it disappoints.

Composition. Same EPS, different sources. If Northwind's £0.41 came from a tax benefit while operating margin fell, the beat is lower quality than it looks. The market reads the composition within minutes; headlines do not.

One-offs. An asset sale flattering net income is not repeatable, and gets discounted immediately.

What to actually read, in order

1. Guidance first. Before revenue, before EPS. It is usually the largest single driver of the move, and it is the part headlines summarise worst.

2. Revenue against expectation. Harder to manage than EPS. A company can reach an EPS figure through buybacks, cost cuts or tax; revenue is closer to what customers actually did.

3. Margins against last year, not last quarter. Most businesses are seasonal. Comparing Q3 to Q2 mostly measures the season. Q3 against the previous Q3 measures the business.

4. Cash flow. Rarely in the headline, frequently the most informative line. Profit up and cash flow down for consecutive quarters is the pattern most worth noticing early.

5. Share count. If EPS beat and net income did not, look for a buyback — see lesson 2.

On the immediate move

The move in the first minutes is fast, thin, and frequently reversed. Trading it means competing with participants who parse filings automatically and act in milliseconds. Buying "because it beat" in the first minutes means buying from somebody who has already read more of the report than you have.

There is also a practical reason it can go badly beyond being wrong about the direction: gaps. Results arriving outside trading hours are the classic source of an overnight gap, which is exactly the situation where a stop loss does not protect you at the level you set. See Stop loss.

What this does not tell you

It does not tell you the direction of the move. If beats reliably rose, that would already be priced in. The relationship between surprise and reaction is real on average across many events, and weak in any single case.

It does not tell you the expectation was reasonable. Consensus is an average of analysts, who talk to the company and to each other.

It does not tell you one quarter matters. Three months is a short time in a business and a long time in a share price. Most quarterly noise is noise.

It does not tell you the report is complete. Headline figures arrive first; the full filing, with the detail that sometimes changes the story, lands later and is read by fewer people.

Where to see this in the app

Earnings hub shows expected against reported per symbol, which is the comparison this entire lesson is about — and it shows history, so you can see whether a company habitually beats by a little, which is itself informative.

Chart → Financials is where you check composition and margins after a headline, rather than reacting to the headline.

Alerts is the sane way to handle a report if you hold the share: be told the price reached a level, then decide — instead of watching a screen at the open.

Chart → the daily range around previous reports shows how much this particular share typically moves on results day. That number, not a general feeling, is what should inform position size going into one.

Trading here is simulated, which makes results day a genuinely good thing to sit through a few times before it involves money.