Whether you’re a long-term investor or a short-term trader, you have to pay attention to corporate earnings. But many people don’t fully understand what these numbers mean and how they affect stock prices. In this article, we’ll cover what corporate earnings are, why they’re important, and how to analyze a company’s earnings report.
Corporate earnings, also called net income or bottom-line, represent how much money a business makes during a given period after all expenses are paid. They’re a key indicator of the health of the economy. Rising profits usually lead to economic growth, while declining profits can signal a slowdown or even a recession.
While there are a number of different ways to measure profitability, the most widely used metric is earnings per share (EPS). This calculation divides a company’s net profit by its total shares outstanding. It’s a useful metric for comparisons between companies, because it accounts for the number of shares each shareholder owns.
Earnings reports are released four times a year and are closely watched by investors and the general public. They’re one of the main factors that drive stock prices up and down. For example, if a company’s EPS is rising and its stock price is climbing, this indicates that investors are optimistic about the future of the company. However, if earnings are falling and the stock price is declining, this suggests that investors expect weaker future results. In either case, the stock price will likely fall until expectations are met or exceeded.