What are quarterly reports and how do you use them?

The annual report of a company, formerly also referred to as the business report, is a publication that appears once a year. The annual report provides a detailed overview of the financial position and activities of the previous financial year. Certain companies are required to publish accounting information and a financial statement by law (the so-called "Publizitätspflicht", disclosure obligation). 

When you're just starting out in investing, company reports can seem complicated and almost daunting. However, with a little practice, you can quickly learn to get an overview of the developments and then dive into the material even deeper. 

Why is an annual report needed?

The annual reports of not only listed companies but also many non-profit organisations, corporations and other types of business inform their stakeholders (owners, shareholders, team members, suppliers, creditors) as well as potential new investors, analysts, job applicants and the media about the economic situation of the company. 

Furthermore, annual reports also cover company-related topics such as the market situation, research and development, social commitment, sustainability and the environment, as well as important events in the business year and their effects.

Financial statements must be audited by auditors such as accounting firms and given an (unqualified) audit opinion - this is not the event for quarterly reports. 

In the broadest sense, the purpose of an annual report is to strengthen the confidence of stakeholders and analysts, to attract new investors and, of course, to illustrate the company's performance. Maintaining a company's contact with stakeholders is part of financial communication and is referred to as "investor relations". 

What is a quarterly report?

A year is a long time, so in addition to their annual report, which is often prepared at the end of a calendar year, many companies publish quarterly (three times a year) reports on the development of their turnover and earnings over a three-month time frame. 

Quarterly reports as interim reports are mandatory to publish in the USA and sometimes mandatory in European countries. Nevertheless, most investors expect regular information, so quarterly reports are almost always provided.

While most companies publish their annual reports as visually-appealing printed publications in PDF format, interim reports are rarely printed. Companies' quarterly figures can be found on the company's website, but almost all of these can also be found on financial websites that feature stock market data. *Please make sure that you always use reputable websites for your research.

Quarterly figures

As you have already read in our articles on chart analysis and fundamental analysis of a stock, the topic of "comparisons" should be the be-all and end-all of your research on many levels. 

Again, reading a quarterly report is all about comparisons - you should at least compare the figures in the quarterly report with those of the same time frame in the previous year, with those of previous quarters and possibly also with the quarterly figures of a similar company in the same industry. In most cases, the annual report replaces the fourth quarterly report, so investors should still extract the quarterly figures for the fourth quarter from the annual report for their records separately.

In any case, when making comparisons, keep the bigger picture of economic developments and the market environment in mind - is the company trying to "sugarcoat" the figures by choosing positive factors? Were projects or developments promised and achieved, and if not, why not?

What should I look for in the quarterly report?

As an investor, it becomes relatively easy to extract the information you need to make informed decisions about your investments after a little practice. So once you have the latest quarterly report of the company of your choice in your hands, it's time to get started. 

Forecasts

First of all, you could look in the management report to the extent to which the forecasts (predictions) made by the company in the current annual report or previous quarterly report about the development of the figures have come true. 

Management forecasts being announced often have a significant impact on a company's long-term share price, so they can be very revealing. Of course, a high market cap (also referred to as "stock market value" - albeit without referring to the value of the company) also plays a significant role here, because not only is the market cap good for liquidity, it also attracts even more interested investors, among other things.

The most important key figures

We then proceed directly to the key figures, which can also be used as indicators for the share price development. These quarterly figures always refer to the developments in the three months prior to the publication of the quarterly report. In terms of figures, this quarterly financial report should at least include a balance sheet, the profit and loss account (P&L) and the cash flow statement. 

Caution: always take special effects into account in your analysis - these are one-off or extraordinary events such as rising commodity prices or the takeover of another company - which can have a significant impact on the figures. 

Furthermore, it is also important to consider all three components (balance sheet, income statement and cash flow statement) as a whole.

The balance

You can think of a balance sheet as a snapshot of a company's financial situation at a certain date (in this event, the end of a quarter). Broadly speaking, a balance sheet is a statement of a company's assets and liabilities in a table. 

On the left, on the assets side, you find all the "assets" of the company. Here you see the "use of funds" of the invested capital (what the capital was used for). 

On the right-hand side are the so-called "liabilities". Here you can see the "origin of funds" - among other things, including equity capital, liabilities and loans (borrowed capital), in short, where the invested capital comes from or how the assets were financed. It is always important to bear in mind that the figures also include estimates, plans and forecasts.

Intangible assets and equity

As an investor, it is advisable to pay attention to the details of a balance sheet, such as the long-term development of intangible assets, for example patents and intellectual property. These values are often dependent on future developments (such as the maturity of products). 

Also, "goodwill" is a figure that is (artificially) compounded when a company acquires an existing business and the asset is not separately identifiable. 

The equity ratio is supposed to show how healthy a company's equity is - according to opinion, this should be at least 40%, and preferably at least 50%, the company should own more than the creditors (collectively, with whom the company has existing debts). 

Profit and loss account (P&L)

The profit and loss statement is a sub-area of the item "equity" and offers a further comparison. For reasons of clarity, the P&L is presented separately from the balance sheet. 

Here, in its most basic sense, all costs (expenses) incurred as part of the business activity, such as rent, salaries and wages, depreciation, property taxes, advertising, utilities and so on, are found on the left-hand side (also called "debit"). 

On the right, the income (also referred to as "credit") is compared, including revenue from goods and services sold, rental income, interest income, etc. 

In very simplified terms, more income than expenses means a profit for the company, higher expenses than income mean a loss. 

The most important figures here are the operating result (EBIT) and the net profit for the year (e.g. adjusted for interest and taxes). Here, among other things, EBIT can be used for international comparability. 

Cash flow statement

Finally, the components of the cash flow statement say something about the liquidity of the company and its solvency. For example, the cash flow from operations can be used to understand whether the company earns more from the sale of products than it spends on manufacturing.

From this, you can deduce how much cash is flowing in ("cash flow") and whether the business is profitable, can pay its dues and how much surplus is being generated. The cash flow may also be negative in the short term. If this is the case in the long term, the company may be at risk of becoming insolvent.

Although it is tempting to delete it, keep the quarterly report after your analysis for your comparisons in the next quarter so that you can base your research on it. 

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