3 fundamental lessons on ASX shares following reporting season

This reporting season was pretty momentous for ASX shares. Investors went into it wondering how well FY22 went and what commentary might be given about FY23 and beyond.

FY22 may well be the last time COVID-19, lockdowns and so on have a sizeable impact on results.

Inflation and changing economic conditions could be a key impact in FY23.

But, the reporting season that just finished was very interesting for a number of reasons. I think there are a few lessons to be learned from it.

Did the market go too negative at the end of FY22?

As inflation concerns ramped up, and concern over what this might mean for central bank interest rates, investors pushed share prices down going into June.

For example, from the start to mid-June 2022, the Wesfarmers Ltd (ASX: WES) share price was down 31%, the JB Hi-Fi Limited (ASX: JBH) share price was down 24%, the Goodman Group (ASX: GMG) share price was down 36%, and the Aristocrat Leisure Limited (ASX: ALL) share price had fallen 28%.

But, the price of many ASX shares rose after that June low.

What’s the lesson here? I think it’s that the (ASX) share market can swing from being too optimistic to being too pessimistic about the long-term prospects of businesses.

It can be hard to be positive or brave about investing when share markets are falling – there’s usually a good reason for it (such as a global pandemic or rapidly rising interest rates). But those times when prices go lower could be the most opportunistic time to buy.

Profits and profit margins increased

One of the main things we want to see from a business’ result is that it’s growing. Higher revenue is ideal and we probably want to see that a business is making profit and achieving stronger profit margins thanks to operating leverage. Profit isn’t always the goal, as some businesses may be investing heavily for growth over short-term profitability.

While I won’t cover every business report – you can check out our reporting season centre for an individual result – I can tell you about how the S&P/ASX 200 Index (ASX: XJO) shares performed overall, thanks to some stats from CommSec about (full-year) reporting companies.

In the year to June 2022, aggregate revenue rose by 10.6%, with 87% of companies achieving revenue growth. The average increase in revenue was 34.5%.

Total expenses went up 8.6%, with 86% of companies reporting higher expenses, with both of these metrics higher than last reporting season. The average increase in expenses was 21.1% in the last reporting season.

However, you may have noticed that ASX 200 share revenue did increase faster than expenses.

CommSec revealed that aggregate statutory net profit after tax (NPAT) lifted by 56.3%, or up 36.5% if excluding BHP Group Ltd (ASX: BHP). Earnings per share (EPS) went up 27.1%, or 23.4% excluding BHP. The average increase in profit across 132 companies was 41.8%. Just under 63% of companies increased profits.

I think this reporting season showed that companies were successful at continuing to grow and collectively grow their profit margin. This is the type of thing that can help with share price growth and dividends.

Management taking care of balance sheets

But, one of the most interesting things was that dividends didn’t increase.

CommSec reported that aggregate dividends fell by 6.1%, though 84% of companies did issue a dividend. However, only 61% of companies lifted dividends, with 27.4% cutting dividends and 11.5% leaving dividends stable, according to CommSec.

Both full-year and half-year reporting ASX 200 shares announced dividends totalling $42.3 billion, down 1.7% year over year.

So, even though collective profits were up, the boards of businesses decided not to grow the dividend.

CommSec also noted that aggregate cash holdings fell by 9.8%. That’s an interesting revelation as companies enter this period of higher interest rates and perhaps lower growth.

The lower dividend may indicate that management teams are feeling cautious about the upcoming period.

The post 3 fundamental lessons on ASX shares following reporting season appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended JB Hi-Fi Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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