Home Profit statement Deciphering Income Reports – The Bull

Deciphering Income Reports – The Bull

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For many investors, looking at the bottom line for the entire year is like going back to days gone by as “kids in the candy store” with a little money in their pockets.

The question for children was the same as the question for adult investors: what should I buy and what should I reject?

Like candy makers, virtually all publicly traded companies will try to portray their financial performance as positively as possible. Financial regulators demand truth in reporting, but that doesn’t stop companies from improving their bottom line the best they can, even if they’re not spectacular.

For investors of all strategies – from value to growth to momentum – earnings reporting have decisive advantages over other means of making the “buy, hold or stay” decision. ‘difference “.

First, earnings reports are scheduled, which gives investors plenty of time to prepare.

Second, there is no lack of detailed information on what to look for in an earnings report, in order to decipher the components of the report.

The common sense assumption behind the vast majority of this advice is that if the company meets or exceeds its profit target, the stock price will rise. The reverse is also considered to be true.

The “piecemeal” analysis of how to interpret income statements, balance sheets, and cash flow statements can be helpful, but it all goes back on how a business performed for the year. Looking ahead, most articles on market education ask investors to refer to the management and outlook statement and management advice.

All too often, these talking statements focus on how the year’s results were achieved. There is no legal obligation for the statement to include anything other than a general view of market conditions, without any specific guidance for the company.

Investors who have followed stock prices after the results were released know that the common sense idea that positive results lead to positive increases in stock prices is wrong in many cases.

Some recent earnings releases support this view. JB HiFi (JBH) released its results for fiscal 2021 on August 16. The company saw double-digit growth in its “high-end” revenue and “bottom line”, in addition to an 18.9% increase in its dividend payout. Net income after tax (NPAT) is up 67.4%.

The stock price only rose a day before settling into a steady decline on August 17.

There are two likely explanations. First, buried on page 30 of a 39-page post, there was a business update showing double-digit sales declines in Australia for the first quarter of 2022 to date (July 1 to August 15th.)

Additionally, the company noted that continuing concerns about COVID 19 made it suitable for JB HiFi to refrain from publishing guidelines for the full year 2022.

Another possible reason is the recent development of the “Amazon invasion”. Investors and many analysts were impressed that JBH resisted Amazon’s initial entry into the Australian market. Amazon is working its muscles, with the southern hemisphere’s largest warehouse completed by the end of 2021. The Sydney warehouse could hold over 11 million items, with the capacity to sort 25,000 items per hour. The Sydney warehouse will be Amazon’s first here powered by robots and 1,500 workers.

In the case of JB HiFi the key for investors to decipher the report was not the historical numbers, but the possible downtrend detected at the start of fiscal 2022. Add to that the specter of Amazon detected by investors knowledgeable enough to follow the trends. competitive threats and JBH looks like a “stay away” or “watch and wait” right now.

The goliath of the Australian telecoms sector, Telstra (TLS), provides another case supporting the view that investors should focus on the growth prospects in the report rather than clinging to financial metrics.

The company reported on August 11, with an immediate and lasting increase in the share price.

The financial results for the year were almost catastrophic.

  • Revenue down 9.1%
  • Total income down 11.6%
  • NPAT up 3.4%
  • Underlying EBITDA (earnings before interest, taxes, depreciation and amortization) down 9.7%.

With numbers like this, how could stock prices recover?

For part of the answer, Telstra had accurately predicted its slowdown, so those results matched the company’s forecast for the year.

Another response appears at the beginning of the report in the opening message from the President and CEO. In a section entitled “A turning point”, the management entitled FY 2021 marked a turning point with the exit of the company from the shadow of the NBN (national broadband network).

The statement highlights the headwinds resulting from the annual transfer of some of the company’s assets to NBN. The surprising cost, according to management, was a drop in EBITDA of up to $ 800 million over the past four years.

In 2018, the company embarked on a strategic transformation strategy called T22 to combat both NBN encroachment and mounting competition.

Management expressed great confidence in the success of its Q22 strategy and published an EBITDA forecast for fiscal 2022 of between 4.5% and 9% growth, with total income slightly up to 23.6 millions of dollars.

Hearing implant supplier Cochlear (COH) is another ASX stock whose share price movement after the financial results for 2021 was announced appears to be at odds with performance.

The company set a record with reported revenue of $ 1.497 billion, up 10%. Implant units increased by 15%. Underlying net profit of $ 237 million increased 54%. Cochlear’s final dividend payment increased by 59%.

Forecasts cannot explain the collapse in the share price as Cochlear has released forecasts for underlying net profit growth for fiscal 2022 to range between 12% and 20%.

The stock price may recover once investors look past the report that was so good, it missed expectations set by big analyst firms like Goldman Sachs. The consensus analysts forecast for the NPAT was $ 245.5 million, about $ 8 million higher than the published result.

As the company predicts two-year earnings growth of an 18.7% increase as well as a 17.7% increase in dividend payments, some investors may react to a warning from Cochlear management included in its policy statement. While the guidance takes into account “some short-term impact of COVID 19,” management went on to warn that “greater disruption of COVID remains a risk factor that is not part of the guidance.

Omnichannel retailer Adair (ADH) achieved record sales in fiscal 2021. Total sales increased 28.5% while underlying profit increased 101%. Investors enthusiastically raised the share price early in the day, only to reverse the close.

Adairs is a specialty retailer with online operations and brick and mortar stores selling housewares and home furnishings in Australia and New Zealand. Additionally, the company now operates Mocka, an online-only distributor of home and living products. Mocka designs some of its products in the Home Furniture & Decor, Kids and Baby niches.

The company was listed on the ASX on June 30, 2015, closing its first trading day at $ 2.66 and has risen 38% since then.

Investors could react to a trade update for the June 30, 2021 period at the time of publication, with total sales for both business units down 16.1% from the same period of the year. 2021.

Investors may be ignoring the fact that it is store sales that are down – 21%. Online sales on Adair’s websites are up 12.9% while Mocka’s online-only sales are up 16.1%.

Given the lockdown situation, Adairs management “did not consider it appropriate to issue guidance for fiscal 2022, given the continuing uncertainty regarding COVID 19”.


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