Corporate earnings are the result of a company’s revenue minus its costs. They are an important indicator of company financial health and ultimately the economy’s growth as well, because when companies earn more, they can reinvest those funds into the business or even pay dividends to shareholders. The earnings reports that companies release quarterly or annually are a major event for the markets, filled with excitement (if expectations are met) and dread (if they aren’t).
When considering a potential investment in a publicly traded company, it’s helpful to understand what exactly these earnings figures represent, how they impact stock prices, and how to interpret them. In this article, we will discuss the basics of corporate earnings, how they impact stocks, and offer a road map for analyzing a company’s earnings report.
Investors should look at both EPS and adjusted EPS when evaluating a company’s earnings. Adjusted EPS subtracts out one-time gains or losses such as asset sale profits, restructuring charges, and litigation expenses to provide a more accurate picture of a company’s underlying profitability.
In addition to revealing earnings per share, a company’s earnings report will also include revenue data and a review of management’s forward guidance for future growth. These comments can often have a big impact on the market, particularly if they are positive or negative. It is also useful to pay attention to whether or not a company’s earnings report was filed on time with the Securities and Exchange Commission (SEC). A late filing could be a red flag of fraud.