Reading results

As companies file results every quarter,investors must factor in the seasonality issue as certain periods will show a sharp rise in sales. For example,consumer goods and auto companies will show a steep rise in sales during the festive season. Sectors like fast-moving consumer durables and pharmaceuticals,which are defensive sectors,will show steady sales in each quarter.

The first thing to look at in the quarterly data is the earnings statement,which reports the gross sales or the revenue generated by the company in a particular quarter. The next step is to look at the total expenses,which include raw material costs,wages and salary expenses,fuel expenses,depreciation and interest outgo for loans. After all these deductions,the net profit will be reported,which will give the broad movement of the earnings per share EPS and also give an indication of the investment and capacity expansion pattern of the company in the future.

Higher inflation pushes up the input costs and directly affects the operating margins of the company. The central bank,in order to tame inflation,raises the interest rates to reduce liquidity in the markets,and higher interest costs affect the profitability of the companies. Automobiles,real estate,consumer durables and banks are some sectors that are affected when interest rates rise. Higher interest rates also affect companies expansion plans as it pushes up the borrowing cost. Investors must look at the interest expenses of companies to see the operating margins and also the debt-to-equity ratio of the company to assess the extent of leverage of the company.

In the past,Indian companies have been able to minimise the cost pressure by taking proper inventory management and product innovation. An Edelweiss equity research report says that the earnings for the financial year 2010-11 will be dominated by cost concerns,with healthy revenue growth being offset by rising costs,leading to pressure on the operating margins.

It expects that the fourth quarter earnings to be no less different. For the current reporting season,more than the actual earnings,what will be keenly watched is how expectations for earnings growth pan out and whether margins will yield to rising cost pressures in FY12, the report underlines,pegging the Sensex EPS estimate at R1,040 or an earnings growth rate of 14.1 for the fourth quarter.

Net revenue or net sales,which is at the top of the balance sheet,is is calculated after deducting excise duty and gives an indication of the earnings expectations. It also shows whether the company has been able to develop new markets and product lines. Investors must compare the net sales on a year-on-year basis as many seasonal factors play a key role in pushing up sales in a particular quarter. For example,in the quarter ended March 2011,capital goods companies are likely to report a stellar performance because of a ramp-up in project execution and year-end closures. Similarly,automobile companies are also expected to show healthy sales because of year-end targets.

After net sales,investors must look at net the profit as an important tool to assess the financial health of the company,as it is this profit that is distributed to shareholders. This also sets the EPS of the company and based on this number,an investor would decide whether to invest for a longer period in a particular stock.

Analysts say investors must keenly analyse the entries under the head other income,which determines the companys exact profit. Other income includes interest earned from bank deposits or mutual funds or any other investments the company has made that accrues them some rent or interest income. During the global economic crisis,companies reported higher other incomes as most of them were saving on cash and had put their expansion plans on hold. Investors must also look into the forex gain or loss that the company has made because it reflects how the company has been able to anticipate the currency movements and hedge adequately against currency fluctuations.