Understanding: The Past Performance Section – Simply Wall St Help Center

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How are financial data presented in Simply Wall St?

Trailing Twelve Month Data

In our reports, we use the Trailing Twelve Months (TTM) data of the company instead of the quarterly data.

TTM refers to a company’s financial data over the past 12 months and should not be confused with annual data which a company reports at the end of each accounting year. TTM numbers can be calculated at any point in time during a year unlike annual data, which is reported only once during a year. As a result, the numbers don’t necessarily coincide. However, when a company has just reported its full-year reports, the TTM calculation would be the same as its annual numbers.

By looking at the TTM data, we are able to evaluate a company’s most recent performance over a longer period of time than just the quarterly performance. This way, investors and analysts can assess a company’s annualized performance instead of looking at the annual performance over the previous fiscal year, which usually contains old data.

Unless specified all financial data reported on the SWS platform are on a trailing twelve months or last twelve months (LTM) basis. The data generally gets updated every quarter when companies report their earnings.

For example:
Microsoft reported revenue of US$62.020b in Q2 2024. Going back to the previous three quarters the revenues reported for Q1 2024, 04 2023, and Q3 2023 were US$56.517b, $56.189b and 52.857b. respectively. Adding up those numbers, we arrive at US$227.583b in TTM revenue. Using this TTM revenue we can measure the performance of Facebook over a full-year period (12 months)

GAAP Earnings

We use unadjusted or GAAP (Generally Accepted Accounting Principles) EPS across the company report and articles to maintain accuracy and uniform comparison across companies.

Overview: Past Earnings Performance Analysis

The Past Performance section presents the historical analysis of how a company has performed, highlighting its consistent earnings growth, revenue increase, and strong return on equity and net profit margins.

Key Information:

Earnings Growth Rate
Annualized earnings growth rate considering historical data over 5-year, 3-year, and 1-year periods, with emphasis on longer-term data.

To arrive at this growth rate, a statistical method called a "line of best fit" is used. Think of it as drawing a line that best captures the overall trend in Microsoft's earnings over these years. By looking at this line, we can see that, on average, MSFT’s earnings have been growing at a steady rate of 20.8% annually.

EPS Growth Rate
Annualized EPS growth rate which considers 5-year, 3-year, and 1-year periods. Calculated using line of best fit.

Industry Growth Rate
annualized earnings growth rate of the company’s industry considering historical data over 5-year, 3-year, and 1-year periods, with emphasis on longer-term data. Calculated using line of best fit.

Comparing a company's growth rate to the industry average provides insights into its relative performance and competitive position. In Microsoft's case, having an earnings growth rate of 20.8% compared to the software industry's 18.9% indicates that Microsoft is doing exceptionally well in terms of earnings growth.

Revenue Growth Rate
annualized revenue growth rate which considers 5-year, 3-year, and 1-year periods. Calculated using line of best fit.

Return on Equity
measures how effectively a company’s management has used shareholder funds to generate profits. Can sometimes be skewed by debt making the ROE higher than it would be without the usage of debt. When ROE is n/a, it implies that the company has negative equity.

It is calculated by dividing earnings by the shareholder’s equity.

Formula: Return on Equity = Net Income / Total Equity

Example below from Microsoft Corporation SEC Form 10K for the fiscal year ended June 30, 2023

Income Statement,

Balance Sheet,

Therefore,

Return on Equity = $72.36B / $206.22B = 0.3508 or 35.1%

Net Margin
the ratio of net profit to total revenue. Indicates the percentage of profit earned per unit of revenue.

Formula: Net Margin = Net Income / Revenue

Therefore,

Net Margin = $72.36B / $211.92B = 34.1%

Net margin is currently at 34.1%. This figure signifies that for every dollar of revenue generated by the company, they can retain 34.1% as profit, even after accounting for all expenses, including operating costs, taxes, and interest. A higher net margin is a positive indicator, suggesting that the company is more effective in managing its expenses and converting its revenue into profit. This, in turn, bodes well for investors and shareholders and highlights the company's robust financial performance and profitability.

Revenue & Expenses Breakdown

This section provides a comprehensive overview of how the company both makes and spends money, taking into account the most recent earnings data over the last twelve months (LTM). It's important to note that the specific contents of this section may vary from one company to another, depending on their industry, size, and financial practices.

Below, you'll find an overview of the elements included in this section, illustrating the typical line items you can expect to encounter in a company's income statement:

Revenue
It's the total amount of sales or services a business generates, reflecting its top-line financial performance.

Cost of Sales
Encompasses the direct expenses incurred in the production or delivery of goods and services, influencing a company's gross profit margin.

Gross Profit
The difference between revenue and the cost of sales, signifying the core profitability of a business before deducting operating expenses.

Earnings
Represent the net profit or income remaining after subtracting all expenses, reflecting the financial success or performance of a company.

Expenses

General & Administrative - Overhead costs essential for running the business efficiently
Sales & Marketing Expenses - includes costs related to promoting and selling products or services to the market.
Research & Development - refers to the financial outlay allocated to activities aimed at innovating, improving, or creating new products, technologies, or processes, vital for a company's growth and competitiveness.
Non-Operating Expenses - costs unrelated to the primary operations of a business, often affecting its bottom-line profitability. If non-operating expenses is not explicitly available, it is calculated by deducting Other Income from the Provision for Income Taxes like in the sample FS below for MSFT.

Source: Microsoft Corporation SEC Form 10K for the fiscal year ended June 30, 2023

Earnings & Revenue History

This section provides a visual representation of the historical performance of revenue, earnings, free cash flow, cash flow from operations, and operating expenses. Over time, you can track the fluctuations and trends in these key financial metrics, offering valuable insights into the performance of the company.

What we check:

Quality of Earnings Check. If unusual items amount to less than 20% of Earnings Before Tax (EBT) or the accruals ratio is below 20%, the stock scores one point.
Growing Profit Margin Check. If the company's net profit margins have increased compared to the previous year, the stock scores one point.

Quality of Earnings Check

A company is deemed to have high-quality earnings when its unusual items amount to less than 20% of its Earnings Before Tax (EBT) or when its accruals ratio is below 20%.

This assessment helps evaluate the quality of a company's earnings by ensuring that unusual items do not significantly impact its financial performance.

Unusual items, or extraordinary items, are one-off financial events not typical in a company's regular operations. They're shown separately on an income statement to give a clearer view of the company's finances. These can be gains or losses from events like asset sales, natural disasters, restructuring expenses, or legal settlements.

In MSFT’s case below, since its unusual items are only the sale on investments, and are less than 20% of the earnings before taxes, it passed the quality earnings check.

Source: Microsoft Corporation SEC Form 10K for the fiscal year ended June 30, 2023

Growing Profit Margin Check

Assesses whether a company's net profit margins have increased or decreased, comparing the current year to the previous year.

In the sample case for MSFT, the current net profit margin stands at 34.1%, which is lower than the previous year's margin of 36.7%. This suggests that the company's profit margins have declined over the specified time frame, hence it failed the check.

Free Cash Flow

Surplus cash generated by a business after covering operating expenses and capital expenditures, indicating its ability to invest, grow, or return value to shareholders.

Formula: Free Cash Flow = Operating Cash Flow - Capital Expenditures

Source: Microsoft Corporation SEC Form 10K for the fiscal year ended June 30, 2023

Therefore,

Free Cash Flow (FCF) = $87.582B - $28.107B = $59.475B

Cash from Operations

Represents the amount of cash a company generates from its core business operating activities, providing insight into its operational strength. See sample from the screenshot for Free Cash Flow above, particularly showing as “Net cash from operations”.

Operating Expenses

Day-to-day costs incurred by a business in running its core operations, including salaries, rent, utilities, and other overheads.

Free Cash Flow VS Earnings Analysis

This section shows a Free Cash Flow Chart that breaks down the factors that impact a company's free cash flow (funds remaining after accounting for necessary expenses and investments) over the past 12 months, offering a visual representation of key elements in play.

The following are added/deducted to the Earnings to arrive at the Free Cash Flow:

Depreciation and Amortization - non-cash expenses representing the gradual wear and tear of asset values over time. For a more accurate cash flow analysis, it’s crucial to add these back as they don’t represent actual cash outflows.
Stock-Based Compensation - a form of employee remuneration paid via stocks. Being a non-cash expense, it doesn’t impact cashflows and is therefore added back to net earnings.
Net Working Capital Changes - represent the fluctuations in the company’s net working capital in the last 12 months, vs the corresponding preceding period. Net working capital is calculated as working capital (total assets- total liabilities) net of non-operating items such as short-term investments or borrowings.
Others - additional adjustments (such as capital expenditures, gain/loss on sale of investments, etc.) applied to net earnings to derive free cash flow.

Free cash flow analysis assesses a company's financial health by gauging its ability to generate cash after covering all expenses. It provides insights into liquidity, financial flexibility, and the ability to meet obligations like debt payments or dividends, and the capacity to invest in further growth. This analysis is crucial for understanding a company's overall financial performance and business sustainability.

Past Earnings Growth Analysis

This section provides insights into a company's financial performance specifically 5-year and 1-year earnings growth. It also considers the company's performance relative to its industry and market.

What we check:

If the earnings for the current year are greater than the earnings from 5 years ago the stock is scored one point.
If current year growth in earnings is greater than the average annual growth in earnings over the past 5 years the stock is scored one point.
If the earnings growth of the company is greater than the earnings growth of its relevant industry average the stock is scored one point.

Earnings Trend Check

This assessment looks at a company's earnings growth in the past 5 years. In the case of MSFT above, it indicates that their earnings have experienced significant growth, with an increase of 20.8% over the last 5 years.

Accelerating Growth check

This check evaluates a company's recent earnings growth compared to its 5-year average. Using same sample company, MSFT, it mentions that they had negative earnings growth in the past year. As a result, it's not possible to make a direct comparison with their 5-year average, as their earnings trend has recently deviated from the long-term average.

Earnings vs. Industry check

This check assesses a company's earnings growth in comparison to the peer group average. Again for MSFT, it highlights that they had negative earnings growth (-0.5%) in the past year. This makes it challenging to compare their performance directly to the Software industry average, which stands at 12.5%.

Return on Equity

What we check:

If the ROE for the company for the current year is 20% the stock is scored one point.

High ROE check - A high ROE suggests that the company is generating a strong return on its shareholders' equity, which can be a positive indicator of financial performance and efficiency. In the sample provided, it indicates that their ROE is relatively high at 35.1% as it is beyond 20%.

Return on Assets and Return on Capital Employed

These two sub-sections are provided as additional information for investors to get a glimpse of the efficiency of the company in generating earnings from their Assets or Capital Employed. These two, however, don’t have direct attribution to the snowflake score.

Return on Assets (ROA)

Measures a company's profitability by assessing how efficiently it generates earnings from its total assets. ROA serves as a broad gauge of asset efficiency and is frequently utilized to compare the performance of companies, particularly in capital-intensive sectors like manufacturing or raw materials production. It is calculated as follows:

Formula: Return on Assets = (Net Income - Net Interest Expense) / Total Assets

Return on Capital Employed (ROCE)

Measures the profitability of a company in terms of the total capital employed by the company, both equity (or shareholders' funds) and long-term liabilities (which are often primarily made up of debt). It is often used in conjunction with ROE to provide a more comprehensive measure of profitability. In particular, ROCE takes into account debt (and increased debt) utilized by a company to generate returns.

Formula: Return on Capital Employed = EBIT / (Total Assets - Current Liabilities)