Beginner Investor Guide: Key Financial Terms for Earnings Announcements

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Many beginner investors open earnings announcements and feel like the numbers are like alien symbols, completely unable to understand their meaning. They lack accounting or financial knowledge, making it easy to make wrong decisions due to misinterpreting data categories. This article is designed for beginners, explaining complex terms in the simplest language. Readers can check the table of contents to quickly find the content they want. It’s recommended to bookmark this article for convenient reference anytime.

Key Points

• Earnings announcements allow investors to understand a company’s profitability and financial condition, aiding in making informed investment decisions.
• The three major financial statements (balance sheet, income statement, cash flow statement) are fundamental tools for analyzing a company’s health.
• Metrics like gross profit, net profit, earnings per share, and P/E ratio reflect a company’s profitability and stock valuation, and investors should understand their meanings.
• Stock prices often fluctuate before and after earnings announcements, but short-term fluctuations do not necessarily reflect changes in a company’s fundamentals; focus on long-term trends.
• Beginners should establish a robust investment strategy, avoid chasing short-term fluctuations, refer to official data and industry trends, and diversify risks.

What Are Earnings Announcements?

Companies periodically disclose their latest financial performance to the public, a process called earnings announcements. Through earnings announcements, companies let investors, analysts, and the public know how much money they earned, how much they spent, and their current financial condition. Earnings announcements help investors assess a company’s health and make more informed investment decisions.

Announcement Timing and Process

Most listed companies have two major earnings announcements each year: interim (half-year) and full-year results. Hong Kong-listed companies typically announce full-year results within three months after the fiscal year ends. The process includes internal audits, board approval, and then official public release. Companies must comply with Hong Kong Stock Exchange regulations to disclose all important financial data on time. This data includes the income statement, balance sheet, and cash flow statement. Investors can use financial statement analysis tutorial websites to learn how to compare financial reports of different companies and understand their position in the industry.

Tip: During earnings announcements, investors should pay attention to key financial metrics in the announcement, such as gross margin, net margin, and debt ratio, as these numbers help assess a company’s competitiveness.

The Three Major Financial Statements

Companies provide three major financial statements with each earnings announcement:

• Balance Sheet: Shows a company’s assets, liabilities, and shareholders’ equity at a specific point in time, reflecting its financial condition.
• Income Statement: Records a company’s revenue, costs, and net profit over a period, revealing its earning capacity.
• Cash Flow Statement: Tracks the company’s cash inflows and outflows, helping investors understand the sources and uses of cash.

By understanding these three statements, investors can comprehensively grasp a company’s financial health and conduct effective comparative analysis. Comparing financial reports of different companies horizontally can help identify which company is more competitive.

Common Financial Terms

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Revenue

Revenue refers to the increase in economic benefits generated by a company from selling goods or providing services during a specific accounting period. This figure usually appears at the top of the income statement. The calculation method is:
Revenue = Total Sales - Returns - Allowances
For example, if a toy company sells goods worth USD 100,000 in a month, with returns and allowances totaling USD 5,000, the revenue is USD 95,000.

Revenue reflects the scale of a company’s core business and market demand. Investors can analyze historical financial data, industry trends, and market research to assess the relationship between revenue changes and market conditions.

• Collect and analyze historical financial data to understand revenue trends.
• Compare sales data from different periods (e.g., year-over-year growth rate) to reveal changes in market demand.
• Analyze sales changes across different regions or product lines to gain insights into market distribution and demand differences.
• Conduct sensitivity analysis to evaluate the impact of key variables on revenue.

Common Misconception for Beginners: Some confuse revenue with net profit. Revenue only represents the total amount from selling goods or services, before deducting costs and expenses, and does not directly reflect how much money the company earned.

Gross Profit

Gross profit is the amount left after deducting the cost of goods sold from revenue. This figure reflects a company’s direct profitability in production or sales. The calculation formula is:
Gross Profit = Revenue - Cost of Goods Sold
For example, if a toy store has revenue of USD 100,000 in a month and the cost of goods sold (e.g., raw materials, labor) is USD 60,000, then gross profit is USD 40,000.

Gross profit helps evaluate a company’s cost control ability for its products or services. A high gross profit indicates an advantage in cost management. For example, TSMC’s gross margin is about 50%, showing high profitability, while Hon Hai’s gross margin is about 6-7%, reflecting different industry characteristics and cost structures.

Tip: Gross profit only accounts for direct costs and does not include indirect expenses like management or marketing costs. Beginners often mistakenly think gross profit is the company’s final earnings, but other expenses must be deducted to calculate net profit.

Gross Margin

Gross margin is the percentage of gross profit to revenue, reflecting how much gross profit a company retains for every dollar of sales. The calculation formula is:
Gross Margin = (Gross Profit / Revenue) × 100%
Using the toy store example, with a gross profit of USD 40,000 and revenue of USD 100,000, the gross margin is 40%.

Gross margin can be used to compare profitability across different industries or companies. Platforms like the Public Information Observatory provide market average gross margins for various industries. For example, the tech industry generally has higher gross margins, while retail has lower ones.

Note: Gross margin is not applicable to industries like finance, insurance, or securities.

Common Misconception for Beginners: A high gross margin does not guarantee a company is profitable; operating expenses and other costs must also be considered.

Net Profit

Net profit (also called net income) is the final profit after deducting all costs, operating expenses, taxes, and other expenditures. The calculation formula is:
Net Profit = Revenue - Cost of Goods Sold - Operating Expenses - Taxes - Other Expenditures
Net profit reflects the company’s overall operating results and is a key indicator for assessing profitability.

Investors can compare net profit differences across companies using the following methods:

1. Compare financial reports of similar companies to identify net profit levels and changes.
2. Observe net profit growth rates to assess business development trends.
3. Join financial report study groups or team analyses for collective insights.
4. Combine news or external information to infer reasons for net profit changes.

Tip: Beginners often think higher net profit is always better, but company size, industry characteristics, and growth potential must also be considered.

Earnings Per Share

Earnings per share (EPS) is the net profit earned per outstanding common share. The calculation formula is:
EPS = Net Profit / Number of Outstanding Common Shares
For example, if a company’s annual net profit is USD 1,000,000 and there are 500,000 outstanding common shares, the EPS is USD 2.

EPS is a key indicator for assessing a company’s profitability and shareholder returns. The market adjusts expectations and target prices for a company’s future earnings based on whether EPS meets or misses expectations, affecting stock prices. When EPS exceeds expectations, stock prices typically rise; otherwise, they may fall.

Common Misconception for Beginners: Some focus only on EPS figures, ignoring whether the company issued new shares or repurchased shares, which can affect EPS calculations.

P/E Ratio

The price-to-earnings (P/E) ratio is the ratio of a company’s stock price to its earnings per share. The calculation formula is:
P/E Ratio = Stock Price / EPS
For example, if a company’s stock price is USD 40 and EPS is USD 2, the P/E ratio is 20.

The P/E ratio helps investors assess whether a stock is overvalued or undervalued. For example, Amazon’s P/E ratio has long been above 80, reflecting high market expectations for its growth. The average P/E ratio for the S&P 500 is about 15-16, serving as a reference for overall market valuation.
Statistics show that buying stocks with P/E ratios between 10-20 typically yields 5-15% returns; P/E ratios above 40 carry higher risks.

Tip: There’s no absolute high or low P/E ratio; it must be judged in context with the company’s fundamentals and industry characteristics. Beginners often mistakenly think a lower P/E ratio is always better, but growth potential and risks must also be considered.

Financial Abbreviations and Terms

Common Report Abbreviations

Investors often encounter various abbreviations in earnings reports or news. These abbreviations help quickly identify the time period or nature of the data. Here are the most common ones:

Beginners should note that “A” represents actual data that has occurred, while “F” represents forecasts by analysts or the company. Quarters (Q) and half-years (H) indicate the time period of the data.

Tip: Different companies may have different fiscal year start and end dates, so pay attention to the explanations in the report.

Forecast vs. Actual Data

Companies and analysts often make forecasts about future performance. These forecasted data (e.g., 2021F) and actual data (e.g., 2020A) may differ. Beginners should learn to distinguish between forecasts and actual data and understand the accuracy of forecasts.

Here are some examples of forecast vs. actual data applications:

1. PhysicsAI predicted heavy-duty hook structural strength, with results very close to actual test data, showing high model accuracy.
2. AI analysis of shrapnel stress showed predicted results matching actual stress data, indicating an effective model.
3. Motor performance predictions had AI model values matching actual operational data, improving design efficiency.
4. Bearing failure predictions allowed early warnings, reducing equipment damage risks.
5. Robotic arm failure predictions were stable, accurately forecasting maintenance times.
6. Wheel rim stress predictions matched actual test results, aiding product optimization.
7. EV water-cooling radiator performance predictions were applied to new product designs, improving cooling efficiency.
8. Bicycle front fork CAE result predictions had high accuracy, assisting engineers in improving designs.
9. Multi-dimensional frame optimization used data predictions to design more durable products.

After model evaluations, these AI prediction tools have proven useful in sales data forecasting and performance evaluation in real-world business applications.

Note: Forecasted data is for reference only; actual results may be affected by markets, policies, or unexpected events. Investors should refer to multiple sources and avoid relying solely on single forecasts.

Earnings Announcements and Stock Prices

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Stock Price Volatility

Stock prices often experience significant fluctuations after earnings announcements. These fluctuations do not necessarily reflect the company’s fundamentals. Market observations show that stock price volatility is typically high before and after earnings announcements, with fluctuations sometimes exceeding actual operational changes. In the short term, stock prices may decouple from fundamentals due to differing market participant expectations. Professional institutions, with access to more information, make more accurate market predictions, but retail investors find it harder to predict short-term trends.

• Stock price volatility rises significantly before and after earnings announcements.
• Short-term fluctuations are often unrelated to company fundamentals and are easily influenced by market sentiment.
• Professional institutions make more accurate predictions, while retail investors face higher prediction challenges.
• Long-term stock price trends do not necessarily follow fundamentals or expectations.
• Over-focusing on short-term fluctuations may lead to missing long-term investment opportunities.

Official statistics, such as China’s Manufacturing PMI, Non-Manufacturing PMI, and Caixin Manufacturing PMI, reflect corporate production activities and order conditions at different times. For example, July Manufacturing PMI dropped from 50 to 49.9, indicating a slight slowdown in production, but the new orders index remained high, showing stable demand. Non-Manufacturing PMI continued to rise, reflecting improving service sector sentiment. These data help explain market reactions during earnings announcements. Additionally, regulatory policies like listed company mergers, crackdowns on insider trading, and fund flows in Hong Kong bank wealth management products also affect market risk appetite, leading to stock price volatility.

Tip: Beginners should not focus only on stock price movements on the day of earnings announcements but pay attention to the company’s long-term development and industry trends.

Investment Strategies

How should beginner investors approach earnings announcements? First, avoid frequent trading due to short-term fluctuations. Long-term observations show that while volatility is high around quarterly reports, long-term stock price trends may not follow short-term news. Investors should base strategies on company fundamentals, industry prospects, and official statistics, focusing on mid-to-long-term strategies.

Suggested methods for beginners:

1. Observe a company’s earnings announcement results over the past few years to assess its stability.
2. Refer to official statistics and regulatory policies to judge overall industry trends.
3. Set stop-loss points to control risks and avoid emotional decisions.
4. Diversify investments across different industries or companies to reduce the impact of single events.
5. Regularly review the investment portfolio and adjust holdings based on company fundamentals.

Note: Chasing fluctuations from earnings announcements carries high risks. Beginners should prioritize stability and gradually build analytical skills.

Comparison of Easily Confused Terms

Gross Profit vs. Net Profit

Many beginner investors confuse gross profit with net profit. In fact, the two are quite different. The table below provides a simple comparison:

Gross profit only accounts for direct costs, such as raw materials and labor. Net profit deducts all expenses, including rent, management fees, taxes, etc. Beginners often mistakenly think gross profit is the money the company earns. In reality, only net profit reflects what the company truly earns.

Tip: When analyzing a company, refer to both gross and net profit. High gross profit but low net profit may indicate excessive indirect expenses.

EPS vs. P/E Ratio

Earnings per share (EPS) and price-to-earnings (P/E) ratio often appear together in earnings reports. They are closely related but have entirely different meanings.

• EPS (Earnings Per Share): Reflects the net profit earned per outstanding common share. Calculated as “Net Profit ÷ Number of Outstanding Common Shares.”
• P/E Ratio: Reflects how many times the market is willing to pay for each dollar of a company’s earnings. Calculated as “Stock Price ÷ EPS.”

For example: If a company’s net profit is USD 1,000,000 with 500,000 common shares, EPS is USD 2. If the stock price is USD 40, the P/E ratio is 20.

Common Misconception: Beginners sometimes focus only on EPS, ignoring the P/E ratio. A high P/E ratio may indicate high market growth expectations but also higher risks. Judgments should consider industry averages and company growth potential.

Understanding financial terms helps investors accurately interpret earnings announcements and improve analytical skills.

1. Through three major financial statements and ratio analysis, investors can more precisely assess a company’s health and reduce misjudgment risks.
2. Quantitative analysis and fundamental learning help beginners gradually build robust investment strategies.

Suggestion: Bookmark this article and leave comments for discussion if you have questions. Continuous learning can improve decision-making quality.

FAQ

When is the best time to buy stocks after an earnings announcement?

Investors should observe stock price trends a few days after the announcement. Making decisions after market sentiment stabilizes can reduce risks from short-term fluctuations.

Will a company’s stock price always fall if net profit declines?

A net profit decline does not necessarily lead to a stock price drop. The market considers the company’s prospects, industry environment, and management expectations. Investors should evaluate multiple factors.

What is a reasonable P/E ratio?

P/E ratios should be analyzed with industry averages and company growth potential.

How to convert financial data in USD to HKD?

Readers can refer to the exchange rate of the day, e.g., 1 USD is approximately 7.8 HKD. Multiply the USD amount by 7.8 to get the HKD amount.

How can beginners quickly assess a company’s financial health?

Investors should first look at gross margin, net margin, and debt ratio. These three metrics reflect profitability and financial risks. Comparing with peer data is more accurate.

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