Among all the factors that can affect stock prices – potential growth, changes in company leadership, general market sentiment, hype, rumors, and about ten other elements – perhaps the most important and straightforward is the company’s earnings.
What is an Earnings Report?
Investors who buy shares of publicly owned companies want to know the same information that business investors review. This includes what financial companies may have earned over the past year (and perhaps longer), what was spent on operations, and the remaining amount – that is, its profits.
What is an Earnings Report?
Companies listed in the United States are required to file an earnings report with the Securities and Exchange Commission (SEC) every three months. This is known as the quarterly earnings report, and it reveals how much money the company has earned, how much it has spent, and the remaining amount. Companies are also expected to report their annual earnings through an annual earnings report.
Understanding Earnings
Financial analysts review quarterly and annual reports to assess whether the company meets expectations and is on the right track for continued growth. If a company’s earnings for the period exceed analyst expectations and/or projected earnings, the stock price often increases. Conversely, if a company fails to meet projected earnings in the quarterly report, this may result in a decrease in stock price.
Earnings Per Share
There are methods to measure a company’s earnings that help make it more accurate than just listing the total remaining amount. Earnings per share (EPS) is a common metric that helps shareholders gauge the impact of the reported period’s earnings and assess the value of the company’s stock.
Price to Earnings Ratio
Another financial benchmark derived from the company’s quarterly or annual report is the price to earnings (P/E) ratio.
EBITDA
One of the metrics that prominently appears in earnings reports and earnings communications is earnings before interest, taxes, depreciation, and amortization (EBITDA). A high EBITDA is considered a sign of good financial health for a company. However, one of the biggest drawbacks of this metric is the exclusion of items such as debt interest, line of credits, and non-cash expenses, which do not reflect a complete picture of the company’s affairs.
When Earnings Reports Can Be Misleading
Earnings reports, in some cases, can hide more than they reveal.
Sometimes, companies intentionally project quarterly revenue lower in a public report than what they expect privately, with the aim of creating an opportunity to exceed expectations significantly. This is known as “sandbagging.”
At times, companies present a rosier picture of their financial position than is true. Inflating financial data and misleading investors can land companies in trouble. One of the most famous examples of a company that used accounting practices to inflate its asset values and profits is Enron, which was the seventh largest company in the United States at that time. In 2001, a series of events unfolded regarding the company and its stock price. The Securities and Exchange Commission began an investigation into its accounting practices, and Enron restated its financial results for the previous four years. Its profits for that period were revised downward by $591 million, and its 2000 debt was increased by $658 million.
The stock price of the company, which had grown significantly – from $7 in the early 1990s to $90 by mid-2000 – plummeted to below $1 by the end of 2001. Investors lost billions of dollars, and Enron filed for bankruptcy in December 2001.
In
This era of online comments and unsolicited recommendations can reflect a lot of emotion in investment decisions. The analytical approach that includes analyzing earnings reports will be of great benefit as it determines whether an investment is suitable for you.
Summary:
Earnings refer to a company’s net profit for a quarterly or financial year period. Earnings help investors determine whether stocks are priced correctly. Earnings metrics, such as earnings per share (EPS) or price-to-earnings (P/E) ratio, can assist investors in comparing different stocks. Earnings can be measured in relation to past performance, the current year, or future (projected) earnings. Sometimes, companies provide guidance that is lower than expectations, which is known as “sandbagging.”
Source: https://www.thebalancemoney.com/it-s-the-earnings-3140774
Leave a Reply