Sink or swim? A guide to navigating the FY23 reporting season

The August reporting season is upon us. For most ASX-listed companies, this means the all-important year-end financial statements are being put to bed by bleary-eyed finance teams and signed off by external auditors, earnings releases are being polished, investor presentations assembled, and management teams peppered with Q&A ahead of their semi-annual grilling by the market.

With a complex economic backdrop and uncertain outlook, how effectively companies communicate will go a long way to determining who sinks and who swims, potentially separating those that re-rate and outperform from those who fall to the bottom of the pile for investors looking to allocate capital.

Earnings estimates appear to be on shaky ground this season, with recent soft trading updates suggesting parts of the economy are finally buckling under the pressure of elevated inflation and higher interest rates.

This August, earnings quality will be as important as quantity for investors and analysts. Key themes to watch include the impact of lower consumer demand, cost inflation, and higher interest expenses on both FY23 performance and the outlook for FY24.

Macro: surviving or thriving at this point in the cycle

With the inflation genie well and truly out of the bottle and the RBA having increased the cash rate from less than 1% at the beginning of FY23 to 4.1% currently, the era of free money is over.

In this environment, investors are favouring companies that demonstrate an ability to manage through demand headwinds, develop and exploit new revenue streams, exercise pricing power, and adjust their cost base to preserve margins and overall profitability, while avoiding any perception of short-term gain for long-term pain.

How well companies articulate these points can influence the market’s reaction on results day.

Balance sheet: cash is king (again)

Investors are also intensely focused on which companies have the financial strength to weather the storm, with cash-generative names heavily favoured over those likely to require near-term equity or debt funding.

Management teams must be very clear when detailing their cash flow, balance sheet, capital management, and investment priorities, with an emphasis on prudent capital allocation likely to be rewarded. Investing ahead of revenue is also likely to attract scrutiny.

Guidance: time to polish your crystal ball?

The question of providing guidance is one of the major discussions around boardroom tables every season and is certain to be hotly debated this year.

Guidance, whether qualitative or quantitative, conveys a company’s level of visibility and confidence in its outlook. The absence of formal guidance, particularly where it breaks with convention, can be seen as a red flag, however companies also need to avoid committing to overly optimistic projections. Investors have long memories and will not hesitate to hold management teams to account for not delivering on their promises.

In a febrile market wracked with uncertainty, companies that can effectively cut through the noise to deliver a clear and compelling story are far more likely to see their shares outperform relative to those that don’t. 

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