1. Top line growth and guidance
Top line refers to the total sales or revenues of the company. The growth in top line has to show quantitative and qualitative improvement over time. Also check if the growth in top line is coming from volumes or from pricing. The former means that the business is picking up at a ground level while the latter relates to pricing power of the company and its position within the industry.
2. Profit growth and guidance
When it comes to quarterly results, net profits tend to be extremely price sensitive. In fact, the market prices tend to react immediately to any sudden shifts in the earnings pattern. What matters are not just the absolute profits but also the net profit number relative to the analyst expectations? Normally, price reaction is based on how the quarterly profits underperformed or outperformed the analyst estimates.
3.Quality of earnings for the quarter
When we talk of quarterly profits and revenues, you also need to look at the quality of earnings. For example, did the growth from a temporary rise in prices? That is not sustainable. Also check if the spurt in profits or fall in profits is due to the existence of extraordinary write offs or incomes. These are again not sustainable and you need to adjust for them accordingly. While earnings determine the price, it is quality of earnings that decide the valuation of the company.
4. Comparison on a YOY basis and on a QOQ basis
How should you compare the profits of the company? Should it be on a YOY basis or on a QOQ basis? In fact, it should be both ways. For example, the normal pattern is to look at YOY growth since that captures the seasonality of operations better. However, in case of sectors that are seeing rapid changes, QOQ also needs to be looked. Telecom industry has been seeing deterioration in ARPUs each quarter due to rising competition and the price war. In such cases, QOQ also needs to be looked at to get a clearer picture.
5. Guidance versus performance for last 4 quarters
Most companies give guidance for the next few quarters. While there are still companies like TCS that do not give forward looking guidance, most Indian companies use the quarterly results to make a statement of the future plans of the company. Watch the guidance closely as that is what will lay out the strategy of the company for the next one year. Especially, guidance on margins is very important.
6. Look out for management warnings and audit qualifications
Read the fine print of the announcement and also read between the lines of the management interviews. Here you will get some important insights. Management may be warning of tough times. Alternatively, auditors may have qualified the audit report due to some objections. All these are important cues for you. Also keep a tab on any major management change that has happened during the quarter.
7. Operating profits trend and operating margins
At the core of all the hue and cry about quarterly results lie the operational metrics. For example, the operating profit trend is very critical as it shows how much the company is generating from its core operations. This gives you an idea of how much of the business is actually sustainable. Also keep an eye on margins as it is a barometer of how well the costs are being managed.
8. Shareholding pattern and pledge data
Normally, any significant information on this front is also disclosed in the quarterly results. This may not have a direct impact on the performance of the company, but it is an important cue nevertheless. If there has been a lot of insider selling in the stock during the quarter, then it is a matter of worry. Also, if too much of the shares of promoters are being pledged, then it does make the stock vulnerable. These are important cues.
Quarterly results are not just about profits and growth but also about how well the cues are progressively gathered by analysts. That is the main purpose.