Speaking from his experience as a Harvard MBA and financial services analyst for Lehman Brothers and Greenwich Associates, John G. Colon visited The Forem for a crash course in earnings statements: how to read them and why you should care.
While it would be impossible to fit all of John’s wisdom into one article, we’re sharing three key takeaways that will hopefully motivate you to invest time in understanding your own company’s earnings statement.
“If you can’t measure it… you can’t improve it.”
Your organization’s financial situation is something we can assume most employees take for granted. However, as John explains, “the pressures, the goals, and the objectives are very different for [orgs] that are growing vs. shrinking, profitable vs. non-profitable…” etc.
Knowing the environment you are working in is a key advantage for aligning with stakeholders, as you can formulate and offer solutions based on data that impacts the bigger picture (something that is always good for your career).
Amongst other insights, financial reports can offer you:
A heads-up for short term impact on valuation and stock price.
Customer, competition, and overall market trends.
A basic overview of how your company is doing (making vs. losing money).
Understanding and interpreting the metrics that represent your business is a huge value add, especially if you’re working toward more senior or leadership roles in your career.
And apart from what these insights can contribute to your problem-solving skills, they may also offer you information that will help steer your career. For instance, if you notice red flags in your company’s finances, or can tell that their growth isn’t sustainable, this knowledge may affect how much of your career you invest there.
Learning the lingo is half the battle.
John offers the encouraging foresight that although earnings statements and other financial records may appear cumbersome from a layman’s glance, once you can translate the acronyms and synonyms, the battle is half-won.
For example, cash flow vs. revenue and costs vs. expenses…
The terms sound interchangeable, but actually mean very different things.
Revenue = money earned from sales.
Cash flow = money transferred in and out of the business.
Costs = singular purchases, closely related to producing a product.
Expenses = more generalized payments intended for revenue (marketing, advertising, etc.).
There is also a whole glossary full of acronyms like “EPS” and “P-E ratio” that make the report look a lot like an algebra equation, but actually represent relatively simple numbers.
Knowing how to translate these elements first and foremost will put you in great shape. From there, knowledge of your industry, competitors, and customers will play a large role in transforming those numbers into actionable data.
Nothing is identical from company to company.
Worth noting: not all earnings statements are created equal.
In the field of finance, there are Generally Accepted Accounting Principles (or, GAAPs), which, John points out, gives org accountants “wiggle room” with how they formulate documents. While they are “principles,” they are also only generally accepted.
Meaning: even once you do your homework, you might have to take a step back or ask some questions to really understand your org’s specific earnings statement.
They may refer to some terms by different names or even include non-GAAP numbers for niche business purposes — all of which are worth discussion to form a holistic picture of the business.
Don’t be afraid to ask for clarity where needed. Your manager and colleagues will appreciate the initiative, and most likely they will be willing to break things down for you.