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What Are Stock Earnings (For Beginners)

What are Stock Earnings? To put it simply, a company’s earnings are just its profits. If you take all the money that came in from selling a product or service, then subtract all the company’s expenses associated with that product or service, the result will be the company’s earnings. Earnings can also be referred to as many other things. Some common synonyms are profits, net earnings, net income and the bottom line. A publicly traded company will release its earnings to the public four times per year, or once every quarter. These earnings results are used to assess the health of any company. Investors like to compare the earnings of different companies. To do this most analysts us the ratio of Earnings Per Share, otherwise known as EPS. EPS is calculated by taking a company’s earnings for a quarter and then dividing that by the total number of stock shares outstanding. Because each company has a different number of shares outstanding and owned by the public, EPS can be used to help make more accurate comparisons. Before a company’s earnings results are released, stock analysts will issue earnings estimates. Research firms then take these estimates and compile them into what is known as the “consensus earnings estimate” The EPS number released each quarter by a company is then compared to these “consensus earnings estimates”. If the EPS released by the company is higher than the estimate, then this is commonly call an “earnings surprise” and typically reflects in an increase in the stock price. On the flip side and EPS number released by a company that is lower than the “consensus earnings estimates” is said to “disappoint”. It is extremely important to note that this is not an exact science. It is common for a company to surprise and see their stock price fall or disappoint and their stock price rise. There are many factors that influence stock prices outside of just EPS. For these reasons, trading a stock that is about to go through earnings can be very risky. This risk is compounded if the stock is known to be volatile around earnings season. It is extremely hard to predict the outcome of an earnings report, so investors must stay acutely aware of when these earnings are scheduled to be released. Most earnings dates are announced far in advance of their actual release and typically take place in either the pre or post market time periods. Always research when the earnings release will be for any stock you choose to invest in or trade.