What is earnings season?

Earnings season gives interested parties an excellent opportunity to take a look under the hood to assess whether or not companies are successfully meeting their own objectives.

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Earnings season refers to the time of year when most publicly-listed companies release their financial results to the market and announce the dividends they intend to pay. It can be a volatile time for share prices, depending on whether companies impress or disappoint investors with their results and dividend payouts. 

In this article, we'll go over the timing of the ASX reporting season, as well as what it can mean for your investment portfolio.

What happens in earnings season?

Publicly-listed companies have an obligation to inform shareholders and the general public on their business activities and financial performance throughout the year. It allows the company's shareholders, and the broader investment community, to make informed decisions about whether or not they should buy or sell shares in the company.

In Australia, companies must report their results at least twice a year to comply with ASX listing rules and the Corporations Act. Companies must release their results to the market no later than two months after the end of their reporting period. This is referred to as the 'balance sheet date'. 

Most companies in Australia have balance sheet dates of 31 December and 30 June. This means the ASX reporting seasons typically fall in February and August.

However, not all companies share the same balance sheet dates. Notably, some of the major banks like Australia and New Zealand Banking Group Limited (ASX: ANZ), National Australia Bank Limited (ASX: NAB) and Westpac Banking Corp (ASX: WBC), have balance sheet dates of 31 March and 30 September. This means they announce their results in May and November.

Also, different regions and financial markets may have different reporting requirements and different earnings seasons. For example, in the United States, the Securities and Exchange Commission (SEC) typically requires companies to lodge quarterly earnings reports. This means US markets (like the NASDAQ or the New York Stock Exchange) have more frequent earnings seasons.

With earnings come dividends

One of the more exciting aspects of earnings season is finding out how much the companies we are invested in will pay us with their next dividend payment. 

Not all companies pay dividends. It is usually the larger, more mature blue-chip companies on the ASX that pay dividends. Younger growth companies, especially in the tech sector, prefer to reinvest their profits in the business. 

Dividends are generally paid twice per year in cash. There is an interim dividend and a final dividend. The amount depends on the company's net profit after tax (NPAT). This, along with free cash, typically funds the dividend. Usually, the bigger the profit, the higher the dividend. The amount paid is broken down to a per share price. 

Many dividends paid by ASX companies carry franking credits. This means the dividend has been fully or partially funded from profits upon which the company has already paid a corporate tax rate (usually 30%). Australians don't like being taxed twice, so we get a tax credit on any dividend monies received that have already been taxed at the company level. Bonus!

Why is earnings season so important?

Earnings season gives interested parties an excellent opportunity to learn about what companies have been up to recently. 

Everyone – from seasoned market analysts and fund managers to everyday shareholders – gets the chance to take a look under the hood to see how companies are functioning. They can assess whether or not a company is successfully meeting its objectives.

Earnings season also gives companies the opportunity to spruik their successes. A well-functioning company should desire to keep the market apprised of its progress because it will attract new investors. 

This is particularly true for junior companies that don't yet have a proven track record of success. One favourable earnings report and their share price can skyrocket!

But earnings season isn't always great for companies, either. Last year, Meta Platforms Inc (NASDAQ: FB), Facebook's newly-renamed parent company, suffered the largest single-day loss in market capitalisation of any US company in history. 

More than US $230 billion was wiped off Meta's market value after its quarterly activities report revealed that Facebook's daily active users had declined for the first time in the company's 18-year history.

Why does a company's share price sometimes fall, even after a positive earnings result?

Sometimes, companies deliver what appears to be a positive result, only to see their share prices crater. If you are an existing shareholder in the company, this can often be confusing and frustrating.

Earnings season is really mostly about expectations. Market analysts will often forecast how they expect certain companies to perform each earnings season, sometimes far ahead of time. Companies that are tipped to perform well will often see their share prices appreciate in the lead-up to earnings season, particularly if they get a lot of media attention.

This means that future growth expectations are already baked into many companies' share prices well before earnings season has even started. If companies fail to hit analysts' consensus forecasts, their share prices will often fall – even if their financial results remain positive. They just weren't as positive as the market expected!

There are many other reasons why a company's share price could fall despite solid earnings. For example, health supplements company Blackmores Limited (ASX: BKL) saw its share price drop by more than 5% when it released its half-year results in 2022, despite increasing bottom-line profit by almost 10% year-on-year. 

However, the company flagged that ongoing global supply chain disruptions meant the outlook for the remainder of the fiscal year was uncertain. Investors don't like uncertainty, so many of them dumped their shares despite the jump in profits.

Earnings season is also all relative. If a company has underperformed compared to its peers, its share price can slump even if its earnings are up. This is because shareholders might interpret it to mean the company is falling behind its competitors and could possibly be losing some of its market share.

Key metrics to look out for when ASX companies report their earnings

Here are some key financial metrics to look out for when reading a company's earnings reports, financial statements, or media releases:

  • Sales: We'll start with the obvious. Sales are how much money a company has made from selling its products during the reporting period. Ideally, you want to see sales growing by a healthy percentage, hopefully exponentially!
  • Gross profit: This is the amount of a company's profit after deducting the costs associated with making and selling its products from its total sales. You definitely don't want to see this trending downward. That means either sales are slumping or the company's products are getting more expensive to manufacture
  • Net profit: This is a company's bottom line. It is what is left over from gross profit after deducting the rest of the company's expenses, including employees' salaries, interest on any company debt, and tax
  • Margins: The two most commonly-used margin metrics are gross profit margin and net profit margin. In both cases, they represent the percentage of a company's sales that translated into profit – one calculation just uses gross profit, while the other uses net. If a company's margins are increasing, it can be a sign that it is achieving economies of scale. Or that customers are willing to pay a premium for its products due to their loyalty to the company's brand
  • Return on equity (ROE): This is a financial performance metric. It is calculated by dividing a company's net profit by its shareholders' equity. ROE measures how efficiently a company is using the money contributed by its shareholders. When looking at a mature company, you want this to be relatively high and stable – or increasing – over time. While returns can vary considerably from industry to industry, a good rule of thumb is to look for companies with an ROE that is at or above the long-term average return of the S&P/ASX 200 Index (ASX: XJO), which is around 9–10%. If a company has an ROE greater than 10%, this would indicate that it is delivering above-average returns to its shareholders, while if its ROE is below 8% it means its returns are relatively poor.
  • Earnings per share (EPS): This is a simple profitability ratio calculated by dividing a company's net profit by the number of ordinary shares outstanding in the company. It can be a good measure of a company's relative performance against its peers.

These metrics are just a few to get you started. Be sure to read some analysis of companies' earnings reports in the finance media. It's helpful to see what experienced market analysts and journalists hone in on with each company.

How to benefit from earnings season

Earnings season is a great opportunity to learn more about the companies you are invested in, or plan to invest in. Long-term investors can use earnings season to check whether their strategies are still making sense and meeting their investment goals.

And don't be put off by one or two bad results. Read what management is saying about the company's recent performance and see if there might be valid reasons for a drop in earnings. Perhaps the company has been spending more on growth projects to expand its market share. Or maybe the whole industry is suffering through a short-term downturn.

If you still believe in the long-term prospects for the company, this shouldn't be a reason to dump your shares. It may provide an opportunity to buy more shares at a bargain price if the market overreacts to the report.

How to safeguard your portfolio in the volatile earnings season

The best way investors can protect themselves from any unwanted volatility in share prices is to hold a well-diversified portfolio. If your portfolio includes shares in companies from various industries, this will leave you less exposed to movements in the price of any one share.

For example, inflationary pressures may be hurting the share prices of growth companies in the technology sector, but booming commodity prices could simultaneously boost the share prices of resource companies. If you held shares in companies from both industries, the value of your overall portfolio might remain relatively stable, with share price increases in one sector offsetting losses in another.

Another investment strategy that can help to reduce volatility is dollar-cost averaging (DCA). Instead of investing all their money into a particular company in one go, investors who follow this strategy will break their investments into smaller chunks, then invest these amounts periodically over time.

DCA reduces the impact of share price volatility because you end up averaging your purchase price out over time. The longer you keep up the strategy, the less impact short-term share price volatility will have on the value of your portfolio. 

This provides much of the same benefit as diversifying your holdings across many different companies. But with DCA, you are diversifying your investments across time.

Key takeaways

Earnings season is one of the most critical times of the year for shareholders. You get to fundamentally assess whether the companies you're invested in – or are planning to invest in – are delivering on their potential.

However, it can also be a particularly volatile time for share prices. So, protect your portfolio by diversifying your investments across a range of companies and industries, and try not to overreact to bad news.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.

Motley Fool contributor Rhys Brock has positions in Blackmores. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Blackmores and Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.