Beyond sliding profits, earnings reports tell more about the COVID-19 economy

Justin Ho Apr 16, 2020
Wall Street has become a lonely place, but the quarterly earnings season has begun. Spencer Platt/Getty Images

Beyond sliding profits, earnings reports tell more about the COVID-19 economy

Justin Ho Apr 16, 2020
Wall Street has become a lonely place, but the quarterly earnings season has begun. Spencer Platt/Getty Images

Every three months, we spend a lot of time talking about corporate earnings statements. Most of the time, we focus on the headline numbers — profits and losses. 

This time, as we get the first earnings statements of the pandemic era, we can pretty much forget about profits for a whole lot of companies. Losses are likely to be a given. 

So will we be able to glean any useful information from this round of reports? Well, it turns out that by digging a little deeper into earnings statements, you can find some clues about how the coronavirus crisis is affecting companies. 

One important indicator of a company’s health is how much cash it has on its balance sheet. Donna Hitscherich, professor of finance at Columbia Business School, said having a lot of cash on hand helps a company keep the lights on.

“Cash gives you time,” Hitscherich said. “You can think about your higher-order needs, rather than just survival.”

Earnings reports also reveal how companies earn money. Whether it’s in cold, hard cash or in debts and IOUs. Hitscherich said investors will be paying close attention to cash flow and whether a company’s business model can continue to generate cash through the crisis.

“If I have two companies, [and] one does most of its sales on credit and another does most of them on cash, I’d rather invest in the company that does most of their sales on cash,” Hitscherich said.

Many companies are trying to free up cash that they’ve been spending on share buybacks and dividends.

“Every moment I look at my screen and see another company that is canceling its dividend,” said Frances Donald, an economist with Manulife Investment Management.

FordBoeing and the sportswear giant Adidas are just some of the companies that have canceled dividends recently. Last month, AT&TWendy’sJPMorgan Chase and other big banks canceled share buybacks.

“It does really highlight how difficult this environment is,” Donald said.

You can also learn something about this economy by comparing a number of earnings reports side-by-side. For example, Jim Vogel, interest rate strategist at FHN Financial, said earnings reports can paint a picture of how consumers are spending.

“Are people spending money on autos? Are they spending money on improving their home offices?” Vogel said.

Other indicators of how companies are doing come from what’s said during conference calls when earnings reports come out, he said.

“People will hunt through for key words and begin to try to compile impressions about what’s happening in the economy, focusing not on the numbers, but on what people are saying.”

Analysts are especially eager to hear about how executives are thinking about the long term.

“And I’m sure that analysts and analyst calls will focus on when do they expect the recovery to begin, and when do they expect their companies to just be able to recover,” said Omar Aguilar, chief investment officer of Charles Schwab Investment Management.

The Securities and Exchange Commission is encouraging companies to disclose how efforts to fight COVID-19 could change their operations and what steps they’re taking to protect their employees.

COVID-19 Economy FAQs

With a slow vaccine rollout so far, how has the government changed its approach?

On Tuesday, Jan. 12, Health and Human Services Secretary Alex Azar announced changes to how the federal government is distributing vaccine doses. The CDC has expanded coronavirus vaccine eligibility to everyone 65 and older, along with people with conditions that might raise their risks of complications from COVID-19. The new approach also looks to reward those states that are the most efficient by giving them more doses, but critics say that won’t address underlying problems some states are having with vaccine rollout.

What kind of help can small businesses get right now?

A new round of Paycheck Protection Program loans recently became available for pandemic-ravaged businesses. These loans don’t have to be paid back if rules are met. Right now, loans are open for first-time applicants. And the application has to go through community banking organizations — no big banks, for now, at least. This rollout is designed to help business owners who couldn’t get a PPP loan before.

What does the hiring situation in the U.S. look like as we enter the new year?

New data on job openings and postings provide a glimpse of what to expect in the job market in the coming weeks and months. This time of year typically sees a spike in hiring and job-search activity, says Jill Chapman with Insperity, a recruiting services firm. But that kind of optimistic planning for the future isn’t really the vibe these days. Job postings have been lagging on the job search site Indeed. Listings were down about 11% in December compared to a year earlier.

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