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How quarterly reports can help in buying stocks

india Updated: Aug 06, 2011 00:28 IST

It’s results season again with companies declaring financial numbers for the quarter ending June. Here are some financial facts you should look for in the quarterly results.

Revenue & profit growth
Revenue: Revenue or sales of a company show how much money it generates by selling goods or services. An increase in the same over the earlier comparable period shows that the company has used its resources more efficiently and vice versa. “A growth in revenue would indicate that the company is moving in the right direction,” said Vinay Agrawal, executive director, equities broking, Angel Broking Ltd.
Net profit: It is obtained by deducting operating expenditure from sales and then accounting for interest, depreciation and tax expenses. Net profit depicts a firm’s sbility to run a lucrative business.

Operating profit margin
This essentially looks at the profit a company makes before accounting for charges such as interest, depreciation and tax. It is also called earnings before interest, taxes and depreciation, or EBITDA. It measures the profit from the core business keeping out other charges. This ratio can be calculated by dividing the figure under operating profit by the figure under revenue. Alternatively, you can take out taxation, depreciation and interest charges from the profit after tax figure.

Interest cover multiple
In the current high interest rate environment, a number of companies are finding it difficult to raise debt funds at a reasonable cost. Also, interest expense is eating into the profit margins for many companies. Interest cover multiple is calculated by dividing a company’s earnings before interest and taxes (EBIT) of one period by the company’s interest expenses of the same period. This number is used to determine how easily a company can pay interest on outstanding debt. A low multiple indicates expenses related to debt are weighing down on a firm’s finances.

Return on equity
This is the net profit divided by the average shareholder’s equity. Return on equity (RoE) shows how much profit a company generates by using shareholders’ investment. Most companies publish related numbers only in the full year financial results.