Corporate earnings – or profits – are the amount of money that a publicly-traded company makes over a period. This metric is important for investors because it allows them to assess a company’s financial health and determine how much value they can place on a share. In the simplest sense, profits are calculated as company revenues minus company expenses. Generally, companies reinvest their profits or pass them onto shareholders in the form of dividends or buybacks. Consequently, growing profits are a positive sign that a company is thriving and able to grow its business.
Earnings reports are released four times a year, and are closely monitored by Wall Street. They often provide insight into future growth plans and financial performance. Companies also use these reports to shape market perceptions and influence investor expectations. As a result, earnings surprises (the difference between actual results and analysts’ estimates) can cause significant market volatility.
Profits are measured in many ways, but one of the most popular is earnings per share (EPS). This metric divides net income by the total number of outstanding shares, providing a clear picture of a company’s profitability per share. It can also be compared to competitors’ EPS to evaluate market share. Other important metrics include revenue, operating margins, and forward guidance.
Although there are a variety of factors that can affect a company’s profitability, earnings tend to move in tandem with overall economic activity. For this reason, growing profits are a positive sign that the economy is strengthening and can help fuel further gains in stock prices.