Earnings mean profit; it’s the money a company makes. It is often expressed in terms of earnings per share (EPS) and is the most important indicator of a company’s financial health.
Investors and analysts use the EPS ratio to compare the earnings of different companies. To calculate EPS you take the earnings left over for shareholders and divide by the number of shares outstanding. You can think of EPS as a per-capita way of describing earnings. Because every company has a different number of shares owned by the public, comparing only companies’ earnings figures does not indicate how much money each company made for each of its shares, so we need EPS to make valid comparisons.
Earnings reports of publicly quoted companies are released four times per year and are followed very closely by Investors. Although it is important to remember that investors look at all financial results, you have probably guessed that EPS is the most important number released during earnings season, attracting the most attention and media coverage. Before earnings reports come out, stock analysts issue earnings estimates – what they think earnings will come in at. These forecasts are then compiled by research firms into the “consensus earnings estimate”. When a company beats this estimate it’s called an earnings surprise, and the stock usually moves higher. If a company releases earnings below these estimates it is said to disappoint, and the price typically moves lower.
All this makes it hard to try to speculate on how a stock will move during earnings season: it’s really all about expectations but strong earnings generally result in the stock price moving up (and vice versa).
When a company is making money it has two options. It can improve its products and develop new ones. It can pass the money onto shareholders in the form of a dividend or a share buyback but in the end, growing earnings are a good indication that a company is on the right path to providing a solid return for investors.