Earnings season is upon us again.
What makes this session different is that most companies will be reporting on negative impacts arising from the COVID-19 pandemic.
Numerous businesses are struggling to adapt to a new reality of shuttered shops, closed borders and near-zero air travel.
The sudden plunge in consumer sentiment and loss of income have been unprecedented.
As such, it’s natural to feel worried and concerned about the financial health of the companies within your portfolio.
But instead of worrying, you might want to take the opportunity to check up on your stocks.
Here are four key areas to watch as companies begin to release their earnings report.
Fall in revenue and profits
The first headline number an investor should look at is the magnitude of revenue decline caused by social-distancing measures.
With more and more people losing their jobs as businesses falter, the pandemic has also resulted in a plunge in consumer demand.
Take Singapore Airlines Limited (SGX: C6L), or SIA, for instance.
The national carrier had to cut 96% of its capacity up to end-April, as border controls around the world were tightened to combat the pandemic.
There is little doubt that SIA will be reporting sharply lower revenue for the quarter ended 31 March.
Meanwhile, companies such as Straco Corporation Limited (SGX: S86), a tourism operator of aquariums in China and the Singapore Flyer, had to temporarily shut down all its attractions until further notice.
It’s highly likely that the group will report sharply lower profits, or even losses when it reports its financial numbers.
Margin decline
Many companies, especially in the manufacturing sector, rely on economies of scale in their operations to achieve a decent operating and net margin.
With lockdowns announced in various countries around the world, some companies have had to close their factories.
This move means that plant utilisation rates may plummet, leading to a margin decline as plummeting revenues are not matched by a similar fall in expenses.
Micro-Mechanics (Holdings) Ltd (SGX: 5DD) and UMS Holdings Limited (SGX: 558) are examples of companies that are affected by such closures.
Investors should be mindful of how these companies’ operating margins may be affected by such temporary closures.
Free cash flow
Free cash flow is a key metric to watch out for.
The financial measure is defined as the operating cash flow generated by a company’s core operations, less the capital expenditures needed to keep the business running.
Businesses that face a sharp plunge in revenue and profits will likely report lower operating cash flow as well.
As an investor, you will need to assess how severe the situation is as a persistent cash burn may result in the company having to raise money through rights issues or taking on more debt
Given the current economic climate, investors can ill afford to cough up more cash to support an ailing company.
Dividend payments
For income-driven investors, an important area to watch out for is dividend payments.
During normal times, companies have been able to pay out generous levels of dividends to investors.
However, if revenue, profit and cash flow plunge, many companies may be forced to either slash their dividends drastically or eliminate them outright.
SPH REIT (SGX: SK6U) has given a glimpse of this by slashing its distribution per unit (DPU) by 80% during its recent quarterly earnings. Other retail REITs may also follow suit.
Hospitality REITs, which have been hit hard by the plunge in tourism numbers, may also report deep cuts in DPU.
Even companies that have not been directly impacted by COVID-19 may suffer from an indirect hit as consumer sentiment worsens.
The challenging conditions may lead to companies cutting dividends to preserve cash.
Get Smart: Brace for impact
Investors should brace for a weak earnings season as companies start to report on how the pandemic has upset their operations.
As the situation remains fluid, investors may do well to keep up with the latest corporate developments for the companies within their portfolio.
While it is important to keep tabs with your companies, remember to think beyond what you see today.
Some of these challenges may turn out to be temporary, and with any luck, all the challenges will pass once COVID-19 is effectively contained.
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Disclaimer: Royston Yang owns shares in Straco Corporation Limited.
