The Bottom Line You can't do much in the stock market without understanding earnings.
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Everybody from CEOs to research analysts is obsessed with this often-quoted number. But what exactly do earnings represent? Why do they attract so much attention? We'll answer these questions and more in this primer on earnings. Key Takeaways A company's earnings are its after-tax net income, or profits, in a given quarter or fiscal year.
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Earnings are crucial when assessing a company's profitability and are a major factor in determining a company's stock price. Earnings per share EPS is investments and internet earnings company's net income or earnings divided by the number of common success on binary options outstanding.
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EPS shows how much a company earns for each share, with a higher EPS indicating the stock has a higher value when compared to others in its industry. Corporations are required to report quarterly results, but EPS tends to get the most attention from investors, particularly when the EPS either beats, matches, or misses what stock analysts had been forecasting.
What Are Earnings?
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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 investments and internet earnings of accounting get a lot more complicated, but earnings always refer to how much money a company makes minus costs.
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Its many synonyms cause part of the confusion associated with earnings. The terms profit, net incomebottom lineand earnings all refer to the same thing. Whether you call it earnings, net income, profits, or the bottom line, you're still looking at the same metric—what a company earns minus costs.
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 shares outstanding. You can think of EPS as a per-capita way of describing earnings.
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- Earnings and EPS: Everything Investors Need to Know
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.
For example, take two companies: ABC Corp.
ABC Corp. Earnings Season Earnings season is the Wall Street equivalent of a school report card. It happens four times per year; publicly traded companies in the U.
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Most companies follow the calendar year for reporting, but they do have the option of reporting based on their own fiscal calendars. Although it is important to remember investments and internet earnings 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 investments and internet earnings of the number they think earnings will hit.
Research firms then compile these forecasts into the trading guide earnings estimate. 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 investments and internet earnings season: it's all about expectations.
Why Care About Earnings?
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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 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 investments and internet earnings 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.
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In the second case, you get your money right away. Typically, smaller companies attempt to create shareholder value by reinvesting profits, while more mature companies pay out dividends.
Neither 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 EPSthe most important indicator of a company's financial health.
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Earnings reports are released four times per year and are followed very closely by Wall Street. In the end, growing earnings are a good indication that a company is on the right path to providing a solid return for investors. Compare Accounts.