If you have been through an Advantexe Business Acumen program, or are currently engaged in any
Business Acumen learning activities with us, you know that the Q4 End of Year Earnings call is the most important call of the year.
This is the call that provides the actual final data of what just happened during the year and also provides a first look and guidance into the upcoming year. As you listen to your own company earning calls or our own versions of your “Decoding the Earnings Call,” here are 8 key business acumen concepts that you should be listening for:
The Immediate Action of the Street – How did the stock do the rest of the day after the earnings call? Was it up or down? Was the volume heavy? What are the analysts saying? If the stock goes down and it’s a significant downturn (more than 3% total value), then the street is speaking and saying, “We don’t like the story and we are selling.” It’s usually not a good sign. Conversely, if the stock rises right away there is renewed interest and a belief that the value is going to increase.
Revenue Achievement – Did the company achieve its revenue (sales) target? Missing a sales target is a big no-no. Missing it more than 2 quarters in a row usually has a CEO thinking about early retirement.
Revenue Growth – Did the revenue grow year over year? Some growth is always beneficial, significant growth is a key indicator of potential long-term success.
Organic Sales Growth – Organic sales growth has become a very important metric of success. It is defined as the growth of sales from the same (core) products and not growth from new products or acquisitions. It’s important because organic growth goes to the core health of the business and if a business has strong organic sales growth, it is a healthy company.
EPS Achievement – Did the company achieve its Earning per Share (EPS) target? EPS is the amount of profit divided by the total number of shares outstanding. This is a huge metric. Showing strong profitability is again critical for long-term value creation.
EPS Growth – Did the EPS grow year over year? Growth in earning indicated a strong discipline and the ability to deliver potential dividends back to the shareholders.
Bonus Metric to Listen for: Missed the Sales Target but Overachieved on the EPS Target – This is an interesting one but one that happens quite a bit. Organizations realize about halfway through the year that they aren’t going to hit the revenue target so they start cutting expenses. The idea is that if they can’t show revenue growth they are going to show that they are very strong at managing expenses and miraculously were able to over-deliver on profits.
Margin Expansion – There are two key margin metrics: the Gross Margin and the Operating Margin. The Gross Margin is the difference between Sales and the Cost of Goods Sold. It’s the first line of sight into the profitability of the organization. The Operating Margin is the difference between the Gross Margin and the Operating Expenses. It essentially tells you how profitable the controllables of the business are. The uncontrollables such as interest, depreciation, and amortization will go into key management metrics like EBIT and EBITDA.
Free Cash Flow – One of the ultimate metrics of performance is the free cash flow. The free cash flow is the amount of cash a business is generating and is the amount of money a company has left after paying operating expenses and capital expenditures.
Good luck listening and decoding your earnings calls. Let me know if you have any questions!
