How to read quaterly results

July 14, 2005

ou must have noticed that every four months -- at the end of June, September, December and March -- the newspapers are full of advertisements about the financial results of companies.

That's because companies in India are required by law to publish their financial results every quarter. They must also send the results to the stock exchange where they are listed.

Earlier, companies used to publish their results only once a year and investors had to wait till the end of the Financial Year (April 1 to March 31) to find out how a company had performed.

Now you can track the performance through the year since the quarterly results show the most recent performance of the company.

If you would like to know more on the annual financial documents, read How to read a Profit & Loss account and How to read a Balance Sheet.

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What must you look for?

Let's take a real example----Tisco's results for the quarter ended March 31, 2005.

Do note that all the figures in the table are in Rs and crores (Rs 10 million = Rs 1 crore).

	4Q05	4Q04	Chg	3Q05	Chg	FY2005
Net sales	3864.6	3200.3	20.8	3731.3	3.6	14498.9
Expenditure	2421.7	2017.1	20.1	2159.7	12.1	8453.6
Operating profit	1442.9	1183.2	21.9	1571.6	-8.2	6045.3
Other income	29.7	40.1	-25.9	33.8	-12.1	148
PBIDT*	1472.6	1223.3	20.4	1605.4	-8.3	6193.3
Interest	9.4	-71	NA	80.9	-88.4	186.8
Depreciation	152.2	185.6	-18	149.5	1.8	618.7
PBT	1311	1108.7	18.3	1374.9	-4.6	5387.8
Tax	393.7	338.2	16.4	484	-24.8	1833.1
Deferred tax	-29.5	3.2	NA	-1.8	NA	-10.5
PAT (excluding extraordinary)	946.8	767.3	23.4	892.7	6.1	3564.7
Extraordinary Items	-38.2	-138.4	NA	-2.2	NA	-90.5
Profit / Loss on sale of investments	0.0	-0.2	-100	28.6	-100.0
VRS Adjustment	0.0	-138.2	-100	-30.8	-100.0
TOTAL EXTRA-ORDINARY INCOME / (EXPENSE)	0.0	-138.4	-100	-2.2	-100.0
PAT (Including Extra Ordinary)	908.6	628.9	44.5	890.5	2.0	3474.2
EPS (Rs Share)	17.1	20.8	NA	16.1	NA	62.7
Equity Capital (In Cr Shares)	553.7	369.2	NA	553.7	NA	553.7
OPM (%)	37.3	37	NA	42.1	NA	41.7

* PBIDT = Profit before interest, depreciation and tax

Column I, II and III

Just by glancing at the results for the fourth quarter, you can easily see that Tisco [Get Quote] made a Profit After Tax of Rs 946.8 crore.

Is that profit high or low? Is it good enough? To answer those questions, you will have to compare the quarterly numbers with those of the same quarter in the previous year.

To make comparisons easy, companies provide these numbers too.

The second column gives the figures for the fourth quarter of FY 2004, and we can compare those figures with the numbers for Q4, FY 2005.

The results of the comparison (the percentage change) are given in the third column. Unfortunately, it's a column the companies don't usually give and we have to work it out by ourselves.

From the third column, we see that Tisco's net sales have grown 20.8% in Q4, FY 2005, compared to Q4, FY 2004. Expenditure rose by 20.1% and Operating Profit by 21.9%. PAT rose by 44.5%.

So you can check out the growth in each item by comparing it with the numbers in the corresponding quarter of the previous year.

Column IV

We've also taken the figures for Q3, FY 2005 because sometimes conditions in the business change dramatically and comparing numbers over a year may not make much sense.

For example, steel prices have gone up very substantially in the past year, so everyone knows that Tisco's fourth quarter results will be much better than the results in the fourth quarter of last year.

But comparing Q4 with Q3 may give a better idea. However, the risk in comparing quarters sequentially is that in seasonal businesses that may not make much sense. Take for instance a company making ice cream. The sales in the winter quarter will be much lower than those in the earlier quarter.

Column V

This gives the change in Tisco's Q4 results compared with Q3.

Column VI

The sixth column gives the full year's figures for FY 2005.

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Points to note

1. The first thing you should do is take out the "extraordinary" items when calculating PAT.

Extraordinary items are one-off items that won't recur, so they unnecessarily inflate or lower profits.

In Q4, FY 2005, for instance, the PAT number we should take is Rs 946.8 crore, which excludes extraordinary items, rather than the Rs 908.6 crore which includes extraordinary items.

Clearly, in Q4, FY 2005, Tisco had an extraordinary expense that dragged profit down by Rs 38.2 crore.

2. The second thing you need to do is consider profits apart from "Other Income". That's because "Other income" is often income that is not strictly related to the business.

If, the only reason a steel company is making profits is due to high "other income" from its investments, it's not a good sign.

Notice how in Tisco's case, the Operating Profit has gone up 21.9%, which isn't bad at all.

3. The most important number for investors, of course, is the Earnings Per Share. Notice how Tisco's EPS has come down to Rs 17.1 for the quarter against Rs 20.8 in the corresponding period of the previous year.

Why is EPS lower in spite of higher profits?

That's because Tisco has increased its capital in the meantime (see from the table how capital has gone up from Rs 369.2 crore to Rs 553.7 crore) and consequently the number of shares has gone up. And because EPS is nothing but PAT divided by the number of shares, Tisco's EPS has come down.

To understand EPS in greater detail, read How to spot a good stock.

4. The Operating Margins have fallen from 42.1% in Q3 to 37.3% in Q4. That's because raw material costs have increased---see how expenditure has risen 12.1% in Q4 compared to Q3 (column 5, row 2).

That's also the reason why Operating Profits declined in Q4 compared to Q3, in spite of net sales being higher by 3.6%.

5. You should also try and consider some of the other items of information which may not be provided in the table. For example, in Tisco's case, it is important to know the volume of steel produced every quarter so that you can judge whether the growth in revenues is because of volume growth or because of price increases.

6. Please remember that the past is no guide to the future. In the case of steel companies, for instance, steel prices have cooled off considerably since the results for the fourth quarter were declared. Also, Tisco has expanded its manufacturing capacity so it will have the benefit of higher volumes. It's important to analyse whether the trends reflected in the quarterly results are likely to continue.

7. Though a company may show good results, its stock price may not rise. That's because the good results are already anticipated by the market and the price has already risen to reflect them.

For the stock price to move, the market should be surprised by the results.

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The best way to consider the quarterly results is to make a grid for yourself on the lines of the table given above, and then analyse the results.

You can then take a call on whether you want to sell your shares, hold on to them or buy more.