Earnings or “after-tax net income” are an important, some say ‘critical’ factor when it comes to share price. That’s because earnings are a barometer of whether a company is and will be successful, i.e., profitable.
For that reason, earnings probably get more attention than just about any other factor, even analyst estimates and company guidance.
By The Quarter
Typically, investors (and analysts) pay the most attention to quarterly earnings reports. If the company beats analyst estimates, praise rains down and share prices move up. If a quarter brings an earnings “miss,” the company is seen to be underperforming its peers.
In terms of how earnings are reported, some analysts look at earnings before taxes, also known as pretax income. This is known as EBT. Analysts who like to see earnings before interest and taxes (EBIT) are looking at data with further screening. Finally, there is EBITDA which measures earnings before interest, taxes, depreciation and amortization.
Earnings Per Share
Earnings per share (EPS) demonstrates profitability on a per-share basis and is commonly used when price-to-earnings ratio (PE) is discussed. The price-to-earnings ratio is arrived at by dividing the price per share by the earnings per share.
This ratio is helpful when comparing earnings of companies in the same industry. If a company’s stock is priced high compared to earnings it is considered “overvalued.” When the PE ratio is low, the stock may be considered “undervalued” and therefore might be a good buy.
Most people know that if a company performs better than anticipated – i.e., net income, sales, EPS, expenses and so forth – share prices will go up. The most common way, in fact, of using information from an earnings report is to compare the actual numbers with what the market expected.
Investors often look at earnings reports when they come out to see if a company has performed significant better than expected. Then they look to see if the stock has already jumped based on that information. If it has not, the stock might be worth considering as a “buy” – assuming there are no other factors that could keep the stock price down.
The same, of course, could be said for a stock that failed to meet expectations or reported slightly better than expected earnings but shot up much more than normal. If the price of that stock has not yet fallen, it could be a potential “short-sell” scenario.
FinanceBoards Widgets To Know
When it comes to all things ‘earnings’ FinanceBoards has many widgets that contain everything from a complete calendar of upcoming earnings to annual earnings trends to estimates, earnings history, EPS and more.
Using information gleaned from earnings widgets, investors can compare data on any number of companies within a sector or more broadly without the need to move from screen to screen. That’s a big time and resources advantage.