What really moves the stock and where is the most important data? A guide to navigating the earnings season
Once every three months, public companies publish their financial results, flooding investors with hundreds of pages of data. How do you know which indicators matter, when can the bottom line be misleading, and why do even phenomenal results sometimes cause a stock to plummet? Globes sorts it out.
Once every three months, the moment of truth arrives for companies on the stock exchange: the earnings season. Traded companies flood investors with thick reports containing hundreds of pages of numerical data, tables, complex calculations, and vague phrasing. The market reacts instantly, and overnight, a hot stock can turn into a disappointment.
For private investors, the earnings season can become a complex maze. However, to understand the state of a public company, there is no need to dive into every footnote. Globes sorts it out.
1. How to find the most important data in the report?
"The common mistake of investors is to start with the net profit line. Every industry has a different economic engine, and therefore the indicators change," says Dr. and CPA Eli El-Al, CEO of Fair Value. "Before reading a report, you must ask: what is the economic engine that creates value in this company, and is it strengthening or weakening?"
Every sector has unique indicators. For instance, in insurance, thanks to the IFRS17 standard, it is crucial to isolate profitability from core activity, neutralizing capital market fluctuations. In banks, key metrics include return on equity, credit profits, and provisions for credit losses. In retail, investors watch same-store sales, while in the tech sector, the focus is on growth rates and recurring revenues (ARR). For tech giants, the most important item has become Capex (capital expenditures), which have reached hundreds of billions of dollars in the AI era.
2. Why is it not enough to look at the profit line?
Net profit can be misleading due to stock options, asset revaluations, or one-time gains. "This does not necessarily testify to an improvement in the business itself," explains Noa Israeli, an investment manager at IBI hedge funds. She suggests analyzing cash flow from current operations: if profit rises but cash flow remains weak, it is a red flag.
Yariv Yurista from Meitav adds that in sectors like income-producing real estate or renewable energy, net profit is often meaningless. It is essential to know how much actual cash the company's activity generates.
3. What is more important: results or forecasts?
The capital market prices the future, so stock movement depends on whether results meet expectations. "The stock price reacts not to whether the company is 'good,' but to whether the results were better or worse than the market expected," notes Israeli. In Israel, investors should pay close attention to the company's own guidance, growth rates, order backlog, and management's tone.
4. How important is the dividend yield?
Many companies distribute dividends, returning cash to investors. Yurista notes that for banks and insurance companies, this is a way to boost return on equity. However, in the tech sector, investors often prefer that the company reinvests profits into development and acquisitions.
5. The report is excellent, so why is the stock going down?
"Our profession is not an exact science," admits Yurista. Even with phenomenal results, stocks can fall if they were already "priced in" or if future guidance is less impressive. Often, investors use the earnings release day as a liquidity point to realize profits, causing volatility regardless of the report's quality.
