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A guide to decode corporate earnings

Tania Kishore Jaleel  |  Mumbai 

It is the results season again and the October-December quarter results have started pouring. IndusInd Bank declared results on Tuesday. Bluechip companies such as Infosys and HDFC will announce theirs on Thursday.

The earnings of a company not only speak of its performance, but also impact its share prices, affecting, in turn, your investments.

We are already into the last quarter of financial year 2012, and the third quarter results will provide some insight into investment decisions. More so, because most mutual fund investors rushed to put money in equity-linked saving schemes (ELSS) in the last quarter to claim tax deductions. Here's how to read the results:

Revenues: Check the operating and net revenues and profits. Compare the current quarter numbers with those of the previous one for sequential or quarter-on-quarter growth, i.e. compare October-December with July-September quarter. Or, compare the figures with the same quarter a year ago for a year-on-year perspective, i.e. October-December 2011 with the October-December 2010 quarter.

A sequential comparison is not applicable for seasonal sectors like aviation, retail, gems and jewellery, consumer durables, infrastructure, cement, power and steel. Reason: You might see a sudden spike in the earnings during their business months. Aviation sees more demand in the holiday season, whereas consumer durables sees it in the third quarter. "Sequential numbers won't give a complete picture. Year-on-year results will give a more accurate growth figure," says Alex Mathew, head, research, Geojit BNP Paribas Financial Services. Experts advise caution on cyclical businesses as aviation, gems and jewellery and hospitality.

In the manufacturing sector — automobiles, fast moving consumer goods and gems and jewellery — look at the volume growth as well. Other income/extraordinary items refers to the income of a company that doesn't derive from its operations and doesn't always occur, but can lift profit figures substantially (example: Sale of land, foreign exchange gains or losses, etc).

Costs: To see how rising input costs have impacted the earnings, consider the cost of raw materials as a percentage of sales over the sequential quarters.

A steady/lower figure means the company has factored input costs through lower consumption, acquisition of cheaper inventory or has pricing power. Calculate operating margins by dividing operating profits by net sales. The higher the margin, the better.

If the company operates on high debt or if the interest outgo is high, profits are likely to reduce sharply. Debt figures are usually available at year-ends in the balance sheet.

Calculate interest cost as a percentage of sales to know how much revenues go towards debt. Again, do not go overboard on companies with high debt burden.

Profits: Higher the net profit margins, the better. It indicates how much you, as a shareholder, have earned from the company's operations. Companies also mention earnings per share or EPS. It is the portion of the firm's profit allocated to each outstanding share of the total shares. It indicates profitability.

Outlook: Market experts say domestic and global headwinds will continue to adversely impact girms. "On the margins front, pain would be further aggravated. Rupee depreciation will keep the operating costs higher, though the input prices would remain flattish," ICICI Securities said in its December quarter preview.

Technology, consumer and cement sectors are likely to announce good results, while construction, real estate and metals may lag.

First Published: Thu, January 12 2012. 00:12 IST
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