Reports Rain Down During Earnings Season

Earnings season peaks this week as more than 1,000 publicly traded companies report their profits and losses for the three month period ending June 2011.

By Friday nearly 85 percent of the S&P 500, an index representing the nation’s largest firms, will have delivered their quarterly financial statements, reports Yahoo!Finance. Kraft Foods, LinkedIn, CVS Caremark, Dean Foods and Alliant Energy are just a few of the companies scheduled to report on Thursday.

Reports came earlier this week from such giants as Marathon Oil Corp., which reported a whopping 40.5 increase in net income that was attributed to rising oil and gas prices, and Allstate, a leading insurer that reported net losses due to an unusually high number of catastrophes.

Main Street investors can be baffled by the barrage of information released during earnings season, the month following the end of each financial quarter when the majority of corporate earnings are released. Publicly traded companies, in keeping with federal regulations, issue the reports to give regular updates on their financial health. The reports may seem overwhelming but they contain valuable information that can indicate whether a company is positioned for growth or headed for a loss.

“If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements,” said the U.S. Securities and Exchange Commission in a guide to earnings reports. “The basics aren’t difficult and they aren’t rocket science.”

Earnings reports provide companies the opportunity to interpret their financial performance in a section called “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Among other things, the section contains information about trends and risks that have affected past performance and will likely shape the future. The SEC requires management to disclose any issues expected to significantly impact a company. The rule aims to provide investors information necessary to assess a company’s financial condition and outlook.

Earnings reports also contain four main financial statements. Balance sheets give a snapshot of what the company owns and what its debts are. Income statements reveal earning and spending, while cash flow statements show the exchange of money in and out of the company. The fourth financial statement, shareholders’ equity, shows changes in the interests held by the company’s shareholders.

Among other things, a balance sheet reveals the amount of equity shareholders own. Equity is calculated using a basic equation that subtracts a company’s liabilities from its assets. The leftover money belongs to the shareholders, or owners, of the company. Income statements tell investors the company’s bottom line, or how much it earned or lost over the reporting period. Income statements calculate earnings per company share, which is the total net income divided by the number of outstanding shares in the company. Cash flow statements reveal a company’s ability to generate cash through its operations, investments or financing activities.

The debt-to-equity ratio compares a company’s total debt to shareholders’ equity. A debt-to-equity ratio higher than 1 means the company’s debt exceeds investment in the company. Earnings reports also contain important footnotes that disclose it accounting policies, tax burden, pension fund liabilities and stock options granted to employees.

“No one financial statement tells the complete story,” said the SEC, “but combined, they provide very powerful information for investors. And information is the investor’s best tool when it comes to investing wisely.”