Earnings typically refer to after-tax net income, sometimes known as the bottom line, or a company’s profits. Earnings are the main determinant of a company’s share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run. Earnings are perhaps the single most important and most studied number in a company’s financial statements, because they show profitability compared with analyst estimates and company guidance. They can also be used to compare a company’s performance over time and relative with its competitors and industry peers. Companies typically report earnings on both a quarterly and annual basis, and earnings reported that deviate from analysts’ expectations can have large impacts on stock price. For instance, if analysts on average estimate that earnings will be $1 per share and they come in at just $0.80 per share, the price of the stock is likely to fall on that miss.
BREAKING DOWN Earnings
Earnings are the amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year. Every quarter, analysts wait for the earnings of the companies they follow to be released. Earnings are studied because they represent a direct link to company performance. A company that beats estimates is outperforming its peers; thus, the CEO may be praised and the board may pat itself on the back. A company that misses earnings is considered to be underperforming its peers, so the CEO will be blamed and the board may elect a new chief executive.
Measures and Uses of Earnings
There are many different measures and uses of earnings. Some analysts like to calculate earnings before taxes. This is referred to as pre-tax income, earnings before taxes, or EBT. Some analysts like to see earnings before interest and taxes, or EBIT. Still other analysts, mainly in industries with a high level of fixed assets, prefer to see earnings before interest, taxes, depreciation and amortization, also known as EBITDA. All three measures provide varying degrees of measuring profitability.