If you ever find yourself listening in an earnings call, may it be for work as a professional analyst or for leisure as someone interested in investing for the very first time, you have to prepare for two things. First, given that the initial part of the call is a financial presentation, you have to be ready to jot down notes. Although sometimes long and tedious, these reports are vital in recordkeeping a company’s performance during a fiscal period. Now, while it’s true that management presenting their numbers to outsiders is an act of transparency, there’s nothing like getting honest data from an on-the-spot question and answer session. So, secondly, be sure to prepare questions.
Before an earnings call is wrapped up, the host opens the lines for questions. Depending on the number and the weight of the questions thrown, the Q&A portion could last about 20 to 40 minutes. This is where it gets interactive and interesting, as people from in and out of the company could start a more in-depth discussion behind the figures and graphs recently presented by the management.
Best Questions to Ask During an Earnings Call:
1. Why did the company’s revenue and income increase or decline?
To begin with, it’s important to note that revenue and income are two different things. According to Investopedia, revenue is the total amount of income generated from the sales of goods or services of a company, whereas net income is the revenue subtracted with the business expenses. Revenue may increase with new product launch with the income getting greater alongside, but income growth can also occur by cutting supplies or shifting to a cheaper supplier. As revenue and income are some of the indicators of a company’s financial strength, seeking answers for the growth or drop of the two will tell you how the company efficiently controls and manages its operating costs. Thus, it will give you an idea about the company’s financial stability.
2. Where and why are the sales trending?
Surely, the sales of the company will be disclosed during the call, but more than the figure, watch out for the charts. A quarterly growth will definitely look better than a yearly increase, but the upward trend of the company’s sales is not always a good sign of investment. You should also check whether its growth is sustainable or just related to a one-time event. In addition, this open-ended question will let the management give a broad response wherein it may tackle future plans that could offer opportunities to expand the business or discuss issues that may impose risks to the company. Such a forecast will also provide you with insights about which areas or business units will be included in the company’s priority list next period.
3. Who are the emerging competitors in the industry?
Knowing the competition will aid investors in their decision-making process as business contenders might impact the company’s sales. After identifying the names of the possible competitors, you can conduct research on whether these companies will introduce new lines of product or develop new technologies that could affect the profitability of the organization in the succeeding terms.
4. What are the challenges that should be anticipated?
This question will reveal the weak spots of the company that could upset its future earnings. For instance, after knowing that there has been a low yield rate issue in a particular business unit which happened to contribute more than 50% of the company’s revenue, it can be assumed that there may be a future cut down in the sales due to a shortfall in the coming term. However, it is difficult to decide whether it is wise to push the investment as this question will be of greater value if you follow it up with how the company is planning to resolve the problem. You will then need to evaluate the viability of their solution or strategy before you make up your mind.
Despite not having any legal requirement for public companies to conduct earnings call, they prefer to do so as it is a way for them to stay transparent to their shareholders by giving them context to the organization’s financial standing, achievements, operations, and issues. It is also an opportunity for analysts and investors, yourself included, to scrutinize the company you are planning to invest in. You wouldn’t want your investment to just go down the drain because you’ve placed your bet on some random company without investigating it. This is why part of being a smart investor is to ask or look for the right questions. To further understand what went down the call or reconfirm some details, you can access an earnings call transcript a little after the call. However, not all companies release an earnings call transcript. Should that be the case, you can always seek help from businesses offering transcription services.