Definition and Examples of a Quarter
A company’s fiscal quarter, or “financial quarter,” is a three-month period used as the basis for reporting financial performance. Often, the four financial quarters are referred to as Q1, Q2, Q3, and Q4.
For accounting purposes, the IRS allows companies to use either the calendar year or a fiscal year that consists of a 52- or 53-week period that doesn’t necessarily have to end on the last day of a month. For this reason, business fiscal quarters won’t always start every third month on the calendar.
For example, Walmart’s fiscal year runs from February 1 through January 31, so its Q1 ends on April 30. Microsoft’s fiscal year begins July 1 and ends June 30, so its first quarter is July 1 through September 30.
How Does a Quarter Work?
Quarterly financial performance is important to public companies because they’re required to report results to the Securities and Exchange Commission (SEC). Public companies that pay dividends to shareholders can pay at any time, but they typically provide dividends each quarter.
Private companies don’t have to disclose financial performance publicly, so the SEC doesn’t require them to produce quarterly financial reports.
The SEC requires publicly traded companies to report quarterly performance using Form 10-Q during the first three quarters of their fiscal year. Companies aren’t required to file Form 10-Q for the fourth quarter. Instead, they can include Q4 performance in Form 10-K, an annual report public companies have to file.
The information companies include on a Form 10-Q is typically much less detailed than Form 10-K information. Another key distinction is that quarterly financial statements are usually unaudited, while financial statements on Form 10-K must be audited.
Corporation officials usually discuss quarterly results with analysts, investors, and the general public during earnings calls. Companies that hold earnings calls typically post an audio recording or transcript of these calls on their websites. They usually issue a press release outlining the highlights of their financial performance for the quarter.
Even though private companies aren’t required to make their financial statements public, they’ll need to generate quarterly reports if they’re preparing for an internal public offering (IPO). To go public, a company needs to file Form S-1, which may include financial results from the most recent four to eight quarters.
Note
To find a company’s Form 10-Q, search for its name or ticker symbol using the SEC’s EDGAR database. You can also find this information on a company’s website, typically in an investor relations section.
What a Quarter Means for Individual Investors
A company’s management will often issue guidance for an upcoming quarter that projects its performance for shareholders. Outside analysts also issue reports, in which they try to estimate a company’s performance for a future quarter or the fiscal year.
Some investors make decisions based on how the company performs against quarterly expectations in a given quarter. For example, if a corporation performs better than analysts predicted during a quarter, some investors may sell their shares if the company’s stock price rises, which could cause the stock price to drop; or those same investors may hold their stock because they believe the company’s next quarter will be a successful one, too.
Quarterly Reporting Has Pros and Cons
Critics of quarterly reporting say that requirements create unnecessary pressure and detract from a company’s long-term focus. However, supporters argue that quarterly reporting requirements promote transparency and help analysts produce accurate reports.
Don’t Rely on Results From a Single Quarter
If you’re an individual investor in a company, it’s worth taking time to examine its quarterly performance. However, a single quarterly earnings report shouldn’t drive big investment decisions. It’s important to take this information with some healthy skepticism. For example, a company may outperform or underperform based on a short-term anomaly, like a big change in oil prices, that doesn’t change its long-term outlook.
Be Mindful of Seasonal Trends
If you’re using a company’s quarterly performance to make investment decisions, don’t just compare results from the quarter that preceded it. Many businesses are seasonal, so comparing the quarter to the same quarter in the previous fiscal year will prove more helpful.
For instance, a big-box retailer may generate significantly more sales during the holiday season. Assuming the company uses a calendar year, comparing the latest Q4 over the previous year’s Q4 instead of the latest Q4 versus the previous quarter would be a better way to measure performance.
Key Takeaways
- A company’s fiscal quarters vary based on when its fiscal calendar begins and ends.
- Publicly traded companies are required to report quarterly results using SEC Form 10-Q for the first three quarters of their fiscal year. Fourth-quarter results can be reported in the Form 10-K annual report.
- A stock’s price can fluctuate significantly based on its performance in a quarter; however, individual investors shouldn’t make big decisions based solely on a single quarter.
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