How To Trade On Earnings Reports In Australia

Almost anyone can invest in publicly listed companies, from professional fund managers responsible for billions of dollars to DIY investors who manage their own affairs via online trading platforms and investment apps.

This spread of equity ownership is one of the reasons why financial regulators require publicly traded companies to disclose regular reports about their financial health.

An earnings season is a period during which publicly listed companies on the ASX release these reports.

Earnings reports include corporate information covering revenue, net income (or profit), operating expenses, earnings per share, and so on. These reports provide at-a-glance insights about the health and outlook for a company.

They tend to be divided into three sections:

• Balance sheet – this reflects a company’s assets, liabilities and shareholder equity
• Income statement – indicates a company’s revenues, expenses and profitability
• Cashflow statement – sums up the amount of cash flowing into and out of a company.

Share prices tend to rise (and fall) more quickly than usual in the run-up to the publication of earnings reports and also immediately after the contents of an update are released.

Reports therefore help traders to determine whether it’s worth taking, or adding to, a position regarding a business, or alternatively avoiding or ditching the stock entirely.

As such, traders in search of volatility seek out earnings reports in the same way as bees go in search of nectar.

In Australia, earnings reports must be reported by ASX-listed companies at least twice a year to comply with the Corporations Act. This differs from the requirements in other regions: for example, in the US earnings are issued each quarter and are mandatory, while in the UK, companies are only required as a minimum obligation to report annually.

Just as the frequency of earnings reports differs among countries, the timing of earnings season also varies internationally. In Australia, companies must release earnings reports no later than two months after the end of their reporting period–known as the balance sheet date.

As most companies have balance sheet dates of December 31 and June 30–in line with the calendar and the financial year–this means that the earnings season usually occurs in February and August of each year in Australia.

August is generally considered to be the main reporting period, considering it is when companies release their full-year results. February, therefore, is when half-year results are divulged.

While this is true for the majority of companies listed on the ASX, some companies have different balance sheet dates and will publish their reports in a different earnings season.

For example, ANZ has balance sheet dates of March 31 and September 30, meaning that the bank releases its earnings reports in May and November to comply with the two-month rule.

Earnings announcements tend to be released outside market trading hours so that the information contained in the announcement can reach as many people as possible and doesn’t interrupt the trading day.

The down time between an announcement and an exchange opening provides traders with time to run through the details behind a specific announcement before deciding whether or how to respond.

Nowadays, it’s relatively straightforward to keep abreast of earnings announcements by referring to online earnings calendars provided either by a particular stock exchange or investing platform. Many calendars include an online tracker/alert feature which can be set to remind the user when an update from a specific company is due.

Another way to keep tabs on upcoming announcements is to check the investor relations sections of company websites. In addition to flagging particular dates and making the relevant documentation available at the due time, companies offer would-be ‘attendees’ the chance to tune-in online to earnings calls and/or other relevant investor presentations.

An earnings call is a conference held by a company featuring key executives, shareholders, the media and analysts. In the call, management will talk about the report and answer questions in relation to the company’s performance over the reporting period, along with its future prospects.

One of the first things for investors to weigh up before deciding to trade on earnings reports is whether they have the appetite to get involved immediately.

Some will prefer to stay away from the potential ups and downs of earnings season and wait for share prices to settle, having had the chance to work through the numbers, plus any guidance that emerged from relevant earnings calls, presentations and media analysis.

For those of a patient disposition, the first phase of an earnings report trading strategy might therefore simply involve watching the patterns unfold from several reporting periods for a company before deciding to buy or sell its stock.

This is because the insights offered from an earnings report can seriously affect sentiment towards a company, which results in contributing significantly to movement in its share price.

It’s also worth bearing in mind the potential ripple effect that one company’s results might have on rival businesses in the same sector, especially if the update is particularly upbeat or dire.

Here are some tips on how to use an earnings report in your investment and trading strategy.

Be Selective

It’s near impossible for an individual trader to cover every company that is taking part in earnings season, so it’s worth refining a list and then just focusing on key players. These could include businesses where you already have exposure, or companies that you’ve been watching and have on the radar as potential additions to a portfolio.

Once you’ve narrowed down a list, establish when a company is due to make an earnings announcement by referring to its earnings calendar.

Do Your Research

Next, take a look at estimated earnings figures which will likely have been trailed by analysts and in the press in the run-up to the announcement.

Bear in mind that market reaction on the day of an announcement does not necessarily home in on the actual numbers contained in the update. Just as important are how near the official figures being disclosed are to analysts’ expectations.

If the numbers end up beating expectations, that could be a sign the share price will rise, with the reverse also being true. Where key metrics (such as profits, customer/subscription numbers, earnings per share, updates about new subsidiaries, acquisitions, etc) rise, but fall short of expectations, this can be damaging to a business’s share price, at least in the short term.

To really get a handle on a company’s financial position–and therefore the potential direction of its share price–it’s worth taking time to work through a company’s historical data in areas such as predicted and actual earnings. By trawling through previous quarterly earnings figures, it’s possible to get an idea of how the market has typically responded in the past and potentially what to expect next.

Where a share price in the past has moved significantly on the publication of an earnings report, this suggests market sentiment tends to be influenced by the announcement. But where there is less price movement, it may be that other factors over and above the announcement have more sway.

Draw Up a Plan and Stick to It

It’s sensible to work out a strategy before piling into the first trade that comes to mind on the back of an earnings announcement.

This could include creating a set of rules for entering or exiting a trade; establishing a set of profits goals; questioning how much time you’re going to set aside to spend trading; and working out a risk management strategy.

This last item would include setting stop losses and limit orders so that a list of trading parameters underpin any instant decisions. Sticking to these removes any emotional elements that creep into a trading approach and also allows investors to remain logical about what they are trying to achieve.

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