Definition and Example of Earnings Estimates
Earnings estimates are forecasts of a company’s future earnings over a specified period. Financial analysts use various models to estimate the level of earnings that the company is likely to announce on a quarterly, semiannual, or annual basis. If you have stocks in your portfolio, it is important to understand how earnings estimates can affect their value. Learn how to use earnings estimates to determine a company’s value, which in turn can affect the stock price of that company.
How Do Earnings Estimates Work?
Financial analysts use modeling to develop earnings estimates for individual companies. Again, they specifically try to determine the earnings per share (EPS) for the company. The EPS formula is as follows: EPS = Total Earnings / Total Outstanding Shares. Once analysts calculate the EPS, they can use this number to estimate the company’s cash flow. This can be used to calculate the approximate value of the company. Financial databases can provide earnings estimates from individual analysts. However, they can also use consensus estimates. The consensus estimate or common forecast represents the average or median of earnings estimates from individual analysts.
What Does This Mean for Individual Investors?
Earnings estimates are important for investors to consider as they can affect stock pricing. When there is a significant gap between the company’s reported earnings and the earnings estimate, this is referred to as an earnings surprise. The earnings surprise can be positive, meaning the company surpassed earnings estimates significantly. Or it can be negative, meaning the company did not perform as well as expected. Companies can contribute to earnings estimates expectations by providing their own future guidance. Along with earnings estimates, other fundamentals of the company, such as the price-to-earnings (P/E) ratio, the price-to-book ratio, and the debt-to-equity ratio should be considered when evaluating the company’s financial health.
Key Takeaways
Earnings estimates are forecasts of the expected earnings per share that the company is likely to announce quarterly, semiannually, or annually. Individual financial analysts can aggregate earnings estimates, which are used to create the consensus earnings estimate. A company can exceed, meet, or fail to meet earnings estimates when its actual earnings are reported. Earnings estimates can be beneficial for investors deciding whether to buy or sell stocks.
Source: https://www.thebalancemoney.com/what-is-an-earnings-estimate-5215292
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