Publicly traded companies are required to publish their financial statements every quarter. They publish an unaudited 10-Q the first three quarters of the year, following by an audited and more comprehensive 10-K at the end of the year. These financial statements must follow Generally Accepted Accounting Principles (GAAP), but most companies also put out an earnings release/presentation with non-GAAP financial data. Non-GAAP financials can be helpful by disclosing additional metrics or adjusting for one-time items, but unscrupulous management teams can also use them to skew the narrative.

Earnings season starts about 2 weeks after the quarter ends. Large banks are the first to report earnings. The market reaction to their reports can offer an indication of where expectations are at. The first company in an industry to report can also offer a read-across to the other companies in that industry. Some companies publish their financial statements on a non-calendar year basis, and may not follow a normal timeline.

Earnings season can be a major catalyst. It’s when publicly traded companies report their quarterly results, give updated guidance, and answer modeling questions from investors. This can drive large upward/downward revisions to earnings forecasts and valuation multiples, which impacts the stock price. A significant amount of alpha is generated around earnings, which can decay until the next earnings date, absent another catalyst.

Questions on an earnings call can be very educational, but analysts also have an inherent conflict of interest. Most companies host an earnings call for sell-side analysts after publishing their financial statements. Sell-side analysts use this opportunity to ask questions about the quarter, guidance for the rest of the year, and general business trends. The questions are usually centered on the 1-2 things driving a stock, and can offer great insight into the company’s financial prospects. However, sell-side analysts may skip the difficult questions. Their business model hinges on providing management access to hedge fund clients. If they embarrass the management team with tough questions, they could get cut off. There is an inherent conflict of interest between sell-side analysts and the company’s they cover, which investors should be aware of.

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