Reading a quarterly result: a worked example

The setup

Below is an illustrative set of consolidated quarterly results for a fictional manufacturer. The figures are invented to demonstrate the method. Nothing here is a view on any real company.

Note two things before starting. These are consolidated figures, which is what you want if a company has subsidiaries. And the comparison is against the same quarter last year, not the previous quarter, because many businesses are seasonal.

Reading it in order

1. Revenue

Up from 1,050 to 1,240, about 18%. On its own this looks good, and it is the number a press release will lead with. It tells you the company sold more. It does not yet tell you what that cost.

2. Operating margin

Here the picture changes. Operating profit barely moved, 147 to 149, while revenue rose 18%. The margin fell from 14.0% to 12.0%.

That combination has a specific meaning: the extra revenue was bought, not won. Either prices were cut, or input costs rose and could not be passed on. Growing revenue with a falling margin is one of the most informative patterns in results, and it usually shows up before profit growth stalls.

3. Net profit

Down from 88 to 76, despite revenue rising 18%. The finance cost line explains most of it: 24 to 38, up more than half.

So the company is selling more, keeping less of each rupee, and paying substantially more interest. Three lines, one coherent story.

4. Debt

Borrowings rose from 980 to 1,410, up about 44%, while operating profit was flat. Debt growing much faster than profit is the pattern behind most corporate failures, and it explains the finance cost.

The check that matters most

Cash from operations fell from 131 to 52 over nine months, while the company still reported a profit each quarter.

Profit is an accounting judgement involving estimates. Cash is a fact. When reported profit holds up and cash from operations falls away, something needs explaining, and the notes are where to look. Common causes are customers taking much longer to pay, or inventory building up because goods are not selling through.

What you can and cannot conclude

From one quarter, not much. That is the honest answer, and it is why a single result should rarely trigger a decision.

What you can say is that this quarter raises specific questions worth answering across the next few: is the margin fall temporary or structural, what is the new debt funding, and why is cash lagging profit. Line up eight quarters and the shape becomes the information.

On the price reaction, expect it to confuse you. A share can fall on results like these or rise, depending entirely on what the market already expected. Prices respond to the gap between expectation and outcome, not to the outcome.

Which is exactly why results are the right document for asking whether your reason for owning something still holds, and the wrong one for predicting next week.

Method in full: reading company results and financial ratios.