A quarter is a unit of time equal to three months, which is used as a financial calendar by organizations in order to simplify making financial reports and paying to shareholders or investors. A quarter as it’s clear from the word itself divides a year into 4 equal parts, usually each part is called Q1 or Q2, which refer to the first quarter and to the second quarter respectively. Quite often quarters are utilized with its year, for example, the third quarter of the year 2020 is written as Q320.
More about Quarter
Typically, companies present financial reporting and make payments to shareholders (also it must be taken into account that not all organizations pay dividends equally). Fiscal quarters and calendar quarters may differ from company to company, since every organization has its own deadlines.
Usually the fiscal year (also FY) and the fiscal quarter are two most essential accounting periods for each organization. It isn’t required, but commonly the fiscal year corresponds to the calendar year. Thus, the quarter comprises January, February, March, the second comprises April, May, June, while July, August, September are included in the third and the last has October, November, and December.
Quarters and company’s progress
Every company needs parameters for evaluating its progress. Quarters may become such a parameter not only for a company, but for shareholders and analysts. Usually one quarter is compared to the other. Since there are many seasonal organizations it isn’t correct to compare, for example, the first quarter and the second of the same year, it is rather more correct to compare with the same quarter of the previous or the next year.
Companies of various fields have their own successful quarters. For example, for retail companies it’s typical to have its most earnings in the last quarter, meanwhile for building companies the first, the second and the third quarters are the most successful.
Moreover, estimating seasonal organizations during its slow quarters brings clearer examples of its progress. If there are increasing profits and sales during quarters with usually low sales, it means the inner strength and potential of a company are growing as well. For example, it’s common for auto dealers to have low sales during the first quarter, but if there is a notable improvement between slow quarters of two comparable years, it may mean higher results in the next quarters.
Since quarterly earnings reports may have a great impact on a company's stock, such reports are extremely essential for public companies and their shareholders. Stock prices can grow or fall depending on a quarter.
This kind of reporting usually comprises guidance, which is expectations for the next quarters. It may contain suppositions not only for a couple of quarters, but for the whole year. Later investors and analysts use these evaluations for further studies. If the introduced guidance doesn’t report resounding success, stocks may drop. Similarly, stocks could increase, If this guidance contains good news.
There are several ways to pay a dividend. For example, in some countries payments to shareholders are made almost equal each quarter. In other countries payments are similarly quarterly divided, but the dividend isn’t even, its amount differs every quarter. There are also countries where dividends are paid once a year.
It was pointed out that some investors are selling their stock, rebalancing their portfolio at the time the ex-date comes or the dividend isn’t increasing as it was expected. Thus, quarterly payments may cause instability in a stock's price.
Non-calendar quarters, also called non-standard quarters, are utilized by some public companies, for example, in order to handle business problems or tax planning. There are some governments whose fiscal year starts in October, thus organizations that rely on these government contracts can manage to end their fiscal year in September.
For example, H&R Block established its fiscal year ending in late April as it’s more convenient for them to end it in the busiest part of the company’s year.
Negative side of Quarters
Still, many concerns surround the quarter system. Instead of working in favor of the business, the system focuses on short-term results and tries to satisfy investors and analysts putting great pressure on organizations.
However, the above problem isn’t the only issue. The other one states since organizations publish an annual report once a year some pieces of information may become obsolete and no longer useful. It’s suggested to use TTM (also trailing twelve months analysis) to tackle the problem.
Using TTM it’s possible to assess the year, even without full data for its fourth quarter. For example, an analyst has to estimate a company's profit for the 2022 in the late November of 2022, it’s enough to take data for the four last quarters, i. e., the first quarter, the second quarter and the third quarter of 2022 and the fourth quarter of 2021. Although such analysis cannot avoid partial duplication or repetition, it will give a clearer idea of the probable results of 2022.
In order to avoid mistakes in making reports of each quarter as it has many things to be in the account, people who are responsible for this should use the best accounting software.