In the 21st century, investors are bombarded with constant news updates on stocks. With the ubiquity of the internet and the ability to constantly track price movements, you can get new information every hour on the stocks you follow. This is especially true for popular stocks with large market capitalizations.

Most of this is just noise. Even though it may seem helpful to get the latest updates on companies, it will most likely lead to information overload, which will lead to poor decision-making. It will hurt you, not help you.

There are only a few things that matter for fundamental investors. Most everything else – such as the financial TV shows, analyst upgrades, or random stock price movements – should be ignored.

But what information actually matters? Above all else, quarterly earnings reports are what beginning investors should track for stocks they follow. The reports have dense financial information and management commentary that can help guide your investment decisions.

In this article, we will learn how to dissect a quarterly earnings report. Topics include:

• How to digest the headline numbers
• Finding the key performance indicators
• The importance of identifying changing growth rates
• Listen to what management has to say

Digesting the headline numbers

An earnings report – typically produced quarterly – is where companies update investors on their financial statements and business developments. It will have updated income statements, balance sheets, and guidance for future periods based on the trends management is seeing at the moment.

You can find earnings reports in a variety of places. Most companies will have an investor relations website that organizes quarterly earnings reports (as well as other presentations) for investors.

Chipotle – the stock we will use as an example throughout this article – has its own website dedicated to investors: https://ir.chipotle.com/. Finding these websites can take a simple Google search. To stay up to date and know when new earnings reports will drop, companies allow you to sign up for an email newsletter that will send a message when a new quarterly earnings report is released.

Investors can also find earnings reports on the SEC’s electronic information system called EDGAR. It has its own website: https://www.sec.gov/search-filings. Search any stock in the database and get up-to-date financial statements, which all have to be filed with the SEC if the company is listed in the United States.

Most earnings reports will summarize the headline numbers for you, which then get regurgitated by news outlets. These include revenue growth, earnings per share (EPS), and profit margins. When a company is reported to have “beat” or “missed” on the headline numbers, it means that Wall Street analysts were either too optimistic or pessimistic about the stock going into the quarter.

If a company beats EPS estimates, it will usually go up immediately after the release. Invert the situation, and it will go down. Simple and easy to understand.

Here are Chipotle’s headline figures from its latest earnings release:

It tells you that EPS was $0.33 and revenue grew 18.2% year-over-year. These both topped analyst estimates, which is why Chipotle stock was up in after-hours trading after the report dropped.

But these are just the headline numbers. They don’t tell the whole story and are mainly used by short-term traders and computers to quickly react to new information. It is not investing but trading and gambling to predict how a stock will react to the headline earnings numbers. Personally, I am terrible at predicting how a stock will react to a quarterly earnings drop (and I never put any investment dollars behind these predictions). It is no more than a coin flip for me.

Fundamental investors focus on long-term trends and management commentary. This is what we will discuss throughout the rest of this article and what you need to take away for managing your own investing portfolio.

Tracking the key performance indicators

For every stock you follow, there will be a few (typically three to five) key performance indicators (KPIs) that tell you how the business is doing. If these KPIs are strong, the company is still in good shape. If they are weak, you may want to change your expectations for the business.

Chipotle has a few important KPIs to track each quarter. Three that pop to mind are:

• Same-store sales growth
  
• Net restaurant openings
  
• Restaurant-level profit margin
  

Same-store sales growth tells investors revenue growth from existing restaurant locations. In other words, are existing Chipotle locations generating more or less sales than a year ago? Last quarter, it was a resounding “more” for Chipotle.

Comparable same-store sales growth was 11.1% for Chipotle in the second quarter, the highest level since 2021.

Net restaurant openings tells investors how many new Chipotle locations were added in the period. Last quarter, this figure was 51, or right around its historical average.

Lastly, there is restaurant-level profit margin. The metric measures how profitable the average Chipotle restaurant is. This helps investors understand how well the company is keeping up with inflation and turning sales into underlying profits. Last quarter, Chipotle’s restaurant-level profit margin grew to 28.9%, another solid period for the company.

These are important KPIs for Chipotle, but every company will have its own set of KPIs to follow. It is up to you as the investor to identify what is important to you and track them every quarter. KPIs will tell you whether a company is poised to grow or decrease its EPS, which is how investment returns are driven at the end of the day.

For a social media company such as Meta Platforms, it may be important to track total users, time spent, and advertising rates. For an enterprise software company it may be important to track total subscribers and customer churn. For an oil company it may be important to track oil prices and total barrels sold.

These metrics will differ for every company, which is what makes this endeavor so enjoyable. No company is the exact same when you analyze it.

Identify changing numbers

Moving deeper into the analysis, it is not only important to track KPIs for your stocks, but identify any changes to financial trends when reading an earnings report.

The rate of change for a metric (whether it be margins, costs, etc.) can tell you a lot about the economic environment a company is facing at the moment and whether its business prospects are improving or getting worse.

Here is Chipotle’s income statement from the first six months of 2024 compared to the first six months of 2023:

As you can see, labor and food costs have stabilized for the company. Food and beverage costs were 29% of revenue in 2024, slightly lower than 2023. Labor costs were 24% of revenue in 2024, again slightly lower than 2023. This indicates that Chipotle is getting through the recent massive bout of inflation in the United States, a good sign for cost management in the coming years.

Second, we can see that “other operating costs,” depreciation and amortization, and impairment costs have declined as a % of revenue compared to 2023.

These inputs, along with higher interest income on the company’s cash balance, led to a net income margin expansion from 13% in 2023 to 14.4% in 2024. Margin expansion is important because it tells investors that Chipotle is getting operating leverage over its fixed cost base with its restaurants as it drives strong traffic and sales growth across the country.

Combined with strong revenue growth, this margin expansion led Chipotle’s net income to hit $815 million in the first six months of 2024, up 29% from the same period in 2023. Understanding why this happened is crucial for investors when analyzing an earnings report because it tells you why profits are moving in the direction they are. Again, profit growth is what matters over the long term.

But, if we look at Chipotle’s stock chart, it is still down 25% from all-time highs despite strong sales and profit growth.

Why?

Because it is not just about the numbers in an earnings report. It is about what management says about them and guidance for future quarters.

Listen to what management has to say

After every earnings release, most company management teams will hop on a conference call and discuss the results with Wall Street analysts. They will typically update investors with more numbers, guide them for future quarters, and then answer questions.

You can find conference call transcripts on websites such as Fiscal.ai or Quartr. These transcripts can help you further analyze an earnings report and identify what management is guiding for over the next few quarters, as well as the long-term business strategy.

On Chipotle’s recent earnings call, management gave out more granular information on same-store sales growth that caused the stock to drop:

“Sales comps were highest in April, driven by the Easter shift, a strong reaction to the return of Chicken al Pastor and several successful activations, including National Burrito day. Comps settled back to around 6% in June, and continue to be driven by positive transactions. July has been more difficult to read so far due to the fourth holiday, weather disruptions in Texas and the impact from a recent technology outage, but we believe the underlying trend remains similar to June. We are maintaining our full year comp guidance of mid- to high single-digit”

Even though the company posted an impressive-looking 11% comparable sales growth rate (an interchangeable term with same-store sales growth), this was due to the new menu item in April as well as National Burrito Day. Also, management mentioned later in the call that it saw artificially high comparable sales growth due to a new minimum wage law in California that requires restaurant workers to get paid at least $20 an hour. All restaurants such as Chipotle had a huge one-time boost in labor costs that they had to offset with price hikes. This will not lead to more profits but does lead to a one-time boost in same-store sales growth.

In June – the last month of the quarter – Chipotle had a same-store sales growth rate of 6%, which was a slowdown from prior quarters. July has been shaky due to the 4th of July, the Texas Hurricane, and the recent CrowdStrike outage. This uncertainty likely spooked investors, which is why the stock has fallen in recent days.

Even though Chipotle’s overall same-store sales growth looked good, investors grew sour on the number when management unpacked the month-to-month figures and its latest update for the start of the third quarter. Investors would have missed this if they just read the headline earnings numbers.

Reading conference call transcripts can help investors understand more granular details and hear about the business you own from the actual people who run it.

Add everything together, and it is clear that earnings reports and earnings conference calls are a vital part of the investment research process. Don’t overcomplicate things: focus on the headline numbers, KPIs, and any changing developments on the financial statements. Keep updated each quarter in order to stay apprised of how your portfolio stocks are doing and why they are rising, falling, or staying put. Otherwise, you are just operating blindly.