You can't do much in the stock market without understanding earnings. Everybody from CEOs to 澳洲幸运5官方开奖结果体彩网:research analysts is obsessed with this often-quoted nu🗹mber. But what exactly do earnings represent? Why do they attract so much attention? We'll ans📖wer these questions and more in this primer on earnings.

What Are Earnings?

A company's earnings are, quite simply, its profits. Take a company's revenue from selling something, subtract all the costs to produce that product, and, voila, you have earnings! Of course, the details of accounting get a lot more complicated, but earnings always refer to how much money a company makes minus costs. Its many synonyms cause part of the confusion associated with earnings. The terms profit, 澳洲幸运5官方开奖结果体彩网:net income, 澳洲幸运5官方开奖结果体彩网:bottom line, and earnings all refer to the same thing.

Earnings Per Share

To compare the earnings of different companies, investors and analysts often use the ratio earnings per share (EPS). To calculate EPS, take the earnings left over for shareholders and divide by the number of 澳洲幸运5官方开奖结果体彩网:shares outstanding. Excel is 澳洲幸运5官方开奖结果体彩网:helpful in calculating this value. 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 val𒐪id comparisons.

For example, take twꦉo companies꧒: ABC Corp. and XYZ Corp. They both have earnings of $1 million, but ABC Corp has 1 million shares outstanding while XYZ Corp. only has 100,000 shares outstanding. ABC Corp. has EPS of $1 per share ($1 million/1 million shares) while XYZ Corp. has EPS of $10 per share ($1 million/100,000 shares).

Earnings Season

澳洲幸运5官方开奖结果体彩网:Earnings season is the 澳洲幸运5官方开奖结果体彩网:Wall Street equivalent of a school report card. It happens four times per year; publicly traded companies in the U.S. are required by law to report their financial results on a 澳洲幸运5官方开奖结果体彩网:quarterly basis. Most companies follow the 澳洲幸运5官方开奖结果体彩网:calendar year for reporting, but they do have the option of reporting based on their own 澳洲幸运5官方开奖结果体彩网:fiscal calendars.

Although it is important to remember that investors look at all financial results, you might have guessed that earnings (or EPS) are 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 (an estimate of the number they think earnings will hit). Research firms then compile these forecasts into the "consensus 澳洲幸运5官方开奖结果体彩网:earnings estimate."

When a company beats this estimate, it's called an 澳洲幸运5官方开奖结果体彩网: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 guess how a stock will move during earnings season: it's all about expectations.

Why Care About Earnings?

Investors care about earnings because they ultimately drive stock prices. Strong earnings generally result in the stock price moving up (and vice versa). Sometimes a company with a rocketing stock price might not be making much money, but the rising price means that investors are hoping that the company will be profitable in the future. Of course, there are no guarantees that the company will fulfill investors' current expectations.

The dotcom boom and bust is a perfect example of company earnings coming in significantly short of the numbers investors imagined. When the boom started, everybody got excited about the prospects for any company involved in the Internet, and stock prices soared. Over time, it became clear that the dotcoms weren't going to make nearly as much money as many had predicted. It simply wasn't possible for the market to support these companies' high 澳洲幸运5官方开奖结果体彩网:valuations without any earnings; as a result, the stock prices of these companies collapsed.

When a company is making money, it has two options. First, it can improve its products and develop new ones. Second, it can pass the money onto shareholders in the form of a dividend or a share buyback. In the first case, you trust the management to re-invest profits in the hope of making more profits. In the second case, you get your money right away. Typically, smaller companies attempt to create 澳洲幸运5官方开奖结果体彩网:shareholder value by reinvesting profits, while more mature companies pay out dividends. N📖either method is necessarily better, but both rely on the same idea: in the long run, earnings provide🌟 a return on shareholders' investments.

The Bottom Line

Earnings are ultimately a measure of the money a company makes and are often evaluated in terms of earnings per share (EPS), the most important indicator of a company's 澳洲幸运5官方开奖结果体彩网:financial health. Earnings reports are released four times per year and are followed very closely by Wall Street. Investors can 澳洲幸运5官方开奖结果体彩网:track the sc❀hedule of earnings reports for publically traded companies through their broker, the Nasdaq calendar, and the SEC's EDGAR system. Growing earnings are a good indication that a company is on the right path to⛄ providing a solid return for investors.