Profit reporting season for ASX-listed companies has begun, so what does it mean for you?
Many new investors have jumped into the share market recently, and maybe you’re one of them.
After plunging to the lows of March last year, the Australian market has been on the rebound, taking first-time investors along for the ride.
And in the last few weeks, the GameStop buying frenzy has caught the attention of some who’ve never watched stocks before.
With interest rates at record lows, the returns you get for keeping your money in the bank have plummeted, so more people are looking for alternative ways to boost their finances.
If you’ve only started buying stocks in the past few months, this might be the first time you’ve heard of reporting season.
So here’s what it all means and how it’s relevant to you.
What is reporting season?
A couple of times a year, the financial press headlines are dominated by profit and loss figures, hits and misses and quotes from the chief executives of Australia’s biggest companies.
Reporting season is a period of a few weeks when many of Australia’s publicly-listed companies disclose the details of their finances.
Members of the public can buy shares in companies that are listed on a stock exchange, for example, the Australian Securities Exchange (ASX).
These companies need to comply with disclosure laws — meaning they need to keep the market informed about the state of their finances and other major changes.
Part of that disclosure is releasing financial reports twice a year, summarising their position for the past six months — including whether they’ve made a net profit or loss.
Typically, this happens in February, providing a snapshot as at the end of December, and then again in August, following the end of the financial year on June 30.
There are some firms that have different end dates for their balance sheets and so don’t adhere to these windows, but the majority of results come out within a few weeks of each other, creating a so-called ‘reporting season’ twice a year.
Why should I pay attention?
When you own shares in a company, you have a stake in how that company performs, because it’ll affect the value of your shares.
If you’ve bought the shares as a long-term investment, you’ll be hoping the value increases over time, so you can make a profit when you sell them.
Paying attention to the company’s results come reporting season will provide a window into how its finances stack up, what its strategy is and how management is viewing the outlook.
The results reports contain plenty of specifics that can help you form a view about whether the company is going to be a good investment.
These include how sales are tracking, what the major sources of revenue are, how high costs are, how much debt it has to repay and how fast it’s growing.
The other thing that you’ll find out by paying attention during reporting season is whether you’re going to receive a dividend payment and, if so, how much it’ll be.
So what is a dividend?
A dividend is a payment returning some of a company’s earnings back to its shareholders.
When a company makes a profit, it may decide to use that money to expand the business or invest in new technology, for example.
But a company that doesn’t have grand expansion plans or has been accumulating profits may decide to distribute some of that profit amongst shareholders through a dividend payment.
Some firms have well-established dividend policies and consistently pay out a certain proportion of their earnings as dividends every six months.
Dividends are announced as an amount per share, so if a company says it’ll pay 30 cents per share, and you own 100 shares in the company, you’ll receive $30.
These stocks are attractive to investors who are looking to generate passive income from their investment — or money for doing nothing.
You can chose to either receive the dividend payment as cash, which gives you the flexibility to invest that money in other stocks if you like, or you can automatically reinvest your dividends in the same stock, growing your shareholding in the company.
Sometimes companies will pay a special dividend, which is a one-off payment and is usually the result of one-off income, such as the proceeds of selling part of the business.
What could happen to stock prices during this time?
Unsurprisingly, what’s revealed in company’s reports can have a major effect on what happens to the price of its shares, and therefore the value of your investment.
But it’s not as simple as profit = share price up, loss = share price down.
Share prices tend to more closely reflect how the company performed compared to expectations — did it miss or beat its own forecasts, or those of analysts who closely watch it?
Under the same disclosure laws mentioned above, companies need to give the market the head’s up if things are tracking much better or worse than expected and not just wait until reporting season rolls around twice a year.
However, there is still plenty of scope for bad or good results to shock the market and lead to big share price movements.
Other factors that influence share price movements are what the management is projecting about the six months ahead, usually referred to as guidance or an outlook statement, and whether it pays a dividend, and how much that is.
And yet another variable is how a company’s share price has performed ahead of reporting season.
With markets booming into the end of the year, some stock prices have shot up, meaning the market is valuing certain companies at way more than their projected earnings would typically justify.
“The elevated parts of the market may find it hard to live up to expectations,” the research team at stockbroker Morgans writes.
Disappointing results could be punished and share prices could fall sharply.
What are we expecting this time around?
This February reporting season will reveal results for the first half of the 2020-21 financial year, so July through December last year.
If you think back to that not-so-long ago time, there was a lot happening:
COVID-19 restrictions began to ease, before Melbourne was struck by a second wave of the virus.
JobKeeper was extended but at a lower rate, as was the JobSeeker supplement.
The trade war with China ratcheted up a notch, with more industries hit with tariffs or import restrictions.
US voters went to the polls and elected Joe Biden.
Iron ore prices were on a tear and the Aussie dollar steadily rose… to name a few things.
All of this will have affected Australian companies in different ways, depending on what industries they operate in, their exposure to overseas markets and their existing financial position.
Tourism-exposed businesses, such as airlines, travel agencies, accommodation and entertainment companies are expected to have remained under pressure over the six-month period.
“We’re going to continue to see that those businesses are struggling, although I do think we are reaching the point where investors can begin to look ahead, and especially now we’re starting to see these regional travel bubbles open,” Saxo Capital Markets strategist Eleanor Creagh tells ABC’s The Business.
Commodities such as iron ore have enjoyed strong prices, which is good news for mining companies — and could mean big dividends for shareholders.
Retailers that cater for electronics and home office needs are also likely to have benefitted from the continuation of working from home during the period.
“That’ll be retailers with a strong online presence, that’ll be technology platforms that go along with it, but also the likes of logistics providers that do the delivery,” Melior Investment Management investment analyst Nina Wilkinson says.
One thing not to expect, though, is concrete guidance for the year ahead — after being burned by a year that defied all forecasts, some analysts think companies are unlikely to make bold projections with any certainty.
Full coverage of reporting season, catch The Business at 8:45pm (AEDT) on ABC News Channel, after the Late News on ABC TV and anytime on iView.