Reporting season is going to truly get underway this week, and there are some things that I'm going to be keeping a lookout for.
We've already seen a few admissions that reporting season could be tough this year with domestic cyclical businesses potentially underperforming such as Adelaide Brighton Ltd. (ASX: ABC).
Here are three of the things I'm looking out for:
Profit margin growth
In my opinion the best businesses to own are ones that are profitability scalable. That means that as they become bigger they earn more profit from each additional dollar of revenue.
If a business has grown its revenue and its profit margin hasn't increased then it's likely something isn't going as well as it should – unless the business is investing for growth of course.
Most commonly, we see this increase of profitability through a growing earnings before interest, tax, depreciation and amortisation (EBITDA) and earnings before interest and tax (EBIT) margin.
How will the high-flyers react?
There are many shares on the ASX priced for a lot of success, even before the recent impact of interest rate cuts by the RBA and US Federal Reserve sent share prices even higher.
I'm keen to see how the market is going to react to the undoubtedly impressive result to be announced by WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), Altium Limited (ASX: ALU), Afterpay Touch Group Ltd (ASX: APT), Xero Limited (ASX: XRO), Pro Medicus Limited (ASX: PME) and others.
Will they finally have a poor (reaction) in reporting season, or will those shares keep marching higher?
Management comments about the outlook and trading updates
There are now suggestions that we may be reaching a tipping point with construction approvals falling, unemployment rising and debt levels growing in Australia which could hurt growth.
However, a few negative statistics won't necessarily turn into a downturn. I'm interested to see what management say, what the short-term outlook for that business is and if they reveal any trading updates for July and August.
Foolish takeaway
I hope you have a successful reporting season and that your businesses report what you want them to. I expect it's going to be a very interesting reporting season as always.
