WHAT ARE EARNINGS?

Earnings are simply the profit a business earns from its operations. Technically speaking, it is your sales less all your costs and expenses. In finance earnings has quite a few terminologies including Net Profit, Gross Profit, bottom line and earnings.

Earnings per Share (EPS):

This refers to the earnings returned on the initial investment. To facilitate inter/intra firm comparison EPS ratio is widely used by accountants. Mathematically, EPS is calculated by divided dividends left over for shareholders by the total number of shares outstanding.

Earning season is the number of times this ratio is published in the stock market. According to U.S.GAAP (Generally Accepted Accounting Principles), companies publish their financial reports quarterly. Prospective investors base their investment decisions on this ratio and on the basis of estimates of forecasted earnings estimates called “consensus earnings estimate”.

When the actual is more than the budgeted it is known as an “earnings surprise” and the price goes up and vice versa. The accuracy of the decision depends greatly upon the accuracy of the gestimate.

WHY DO INVESTORS CARE ABOUT EARNINGS?

Earnings are important to investors for the simple reason that they influence stock prices which in turn reflect how profitable a particular business is. It does not, however, guarantee future profitability. During times of boom the expectations of people rise with the rising stock prices and prospects of greater profitability. There are two options when it comes to generating money for a business. It can either improve its products or it can give out shares to shareholders or it can buy back shares.

Although EPS is a very important measure of profitability, it involves a high degree of risk and uncertainty.

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