What to look for in quarterly earnings that Wall Street analysts often highlight — and what they sometimes miss.
Quarterly earnings are the one time a company is legally required to tell you how the business is actually doing. The numbers don't lie (usually). But they can be presented in misleading ways. Here are five red flags to watch for.
If revenue is growing at 5% but operating expenses are growing at 15%, the company is spending more to generate less. This is especially dangerous in tech companies that justify losses with "investing in growth." At some point, growth has to justify the spending.
What to look for: Compare revenue growth rate to OpEx growth rate for the last 4 quarters. A widening gap is a red flag.
Companies love reporting "adjusted" earnings that exclude stock-based compensation, restructuring charges, and one-time items. But if there are "one-time" charges every quarter, they're not one-time — they're the cost of doing business.
What to look for: Compare adjusted EPS to GAAP EPS. If the gap is more than 30%, the company is heavily massaging the numbers.
A company can report positive earnings while burning cash. This happens through accounting tricks like capitalizing expenses, aggressive revenue recognition, or extending payment terms to customers.
What to look for: If net income is positive but operating cash flow is negative for 2+ quarters, something is wrong.
When a company "withdraws guidance," it almost always means things are bad enough that they don't want to put a number on it. Lowered guidance is less alarming but still means management overestimated.
What to look for: Compare current quarter's guidance to previous quarter's. Watch for phrases like "uncertain environment" or "limited visibility."
If executives sell significant shares in the weeks before an earnings release, they may know something you don't. This is technically illegal (insider trading), but enforcement is inconsistent and "pre-planned" selling programs provide cover.
What to look for: Check Form 4 filings on SEC.gov for the 30 days before earnings. SimpliInvest flags unusual insider activity automatically.
Earnings reports are the closest thing to truth you'll get from a public company. But you need to read between the lines. SimpliInvest analyzes financial fundamentals as part of every risk assessment, flagging the patterns described above.
*This is educational content, not financial advice.*
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