Well if you weren't already aware, it's ASX earnings season. Us Fools are busy bringing all the news coming out of our favourite ASX companies to you in record time, but it's important to know what to look for in the ocean of numbers out there.
Depending on the stock, investors are looking for different qualities. For growth stocks like Afterpay Touch Group Ltd (ASX: APT) or Xero Ltd (ASX: XRO), investors are more attuned to subscriber growth (Xero) or new users and retailers (Afterpay) than actual profits or earnings. These statistics tell us more about how the business is faring at this point in the company's life cycle.
But when it comes to dividend payers like Westpac Banking Corp (ASX: WBC) or Coles Group Ltd (ASX: COL), all most investors want to know is how much cash is coming in (and out) the door. This is because these numbers tell us how likely a dividend increase (or cut) will be going forward – let's face it, no one is buying Coles shares to retire at 35 from capital gains.
Saying this, here are the basic numbers I like to look at in a typical earnings report – dividend, value and growth shares alike:
- Revenue – I want to know that gross sales are at least being sustained but hopefully rising. This number is more important for growth shares but even dividend payers like Westpac should be at least maintaining revenue levels for me to be impressed. A rising revenue stream (to me) means that a company has a future. Simple.
- Underlying earnings – put simply, this is revenue minus expenses and shows me that the company can keep a lid on its costs (as we all know, it's a lot easier to spend than earn). This one is more important for a value or dividend share, as growing companies often run at a loss while they are expanding (Xero, for example).
- Earnings-per-share (or EPS) – this is an important number because it tells us how much cash the company is giving us back for our capital. If a stock has a negative EPS trend, it's a big alarm bell and you should look carefully at why this is happening.
- Payout ratio – this is a big one for any dividend investors out there. Payout ratio is the best indicator of whether a dividend is sustainable. If a company is only paying out 40% of its profits as dividends, you can reasonably expect a growing yield for at least a few years if all goes well. But if a company (looking at Westpac here) is paying out 90% plus, it's pointing to a possible cut in the future.
Foolish takeaway
Although this is by no means a comprehensive guide, these numbers should give you a fairly basic understanding of how a company is performing from an earnings report. But as always, do your own research before putting your hard-earned capital into a company.
