Earnings represent the net profit or net profit generated by a company in a given period. It is found by deducting all types of expenses incurred by the company during a period from the revenue or sales generated during the period.
For example, if a company’s revenue or sales amounted to $100 million in a year,
while its cumulative expenses amounted to $50 million in a year, the company’s net profit or earnings for the year would be $50 million.
WHAT ARE EQUITY EARNINGS?
Analysts try to estimate the earnings of many popular companies to determine the future direction of their shares and make an investment case. Earnings are reported in various forms, such as gross income, net income, and earnings per share.
A company’s gross income is calculated by subtracting the cost of goods sold from revenues. Net income is calculated by deducting operating expenses and taxes from its gross profit. However, if the company’s revenues are not sufficient to cover its expenses, it would report a gross and net loss.
A company’s earnings per share or EPS is calculated by dividing its net income by the total number of common shares outstanding. For example, if a company’s net income for a period was $10 million, while its average number of shares of common stock outstanding during the period was $5 million, earnings per share or EPS would be $2 for the period.
HOW DO EARNINGS AFFECT THE STOCK PRICE?
Investors analyze various financial metrics, such as revenue, earnings, earnings per share (EPS), EPS growth rate, and a number of other measures to determine a company’s financial health.
The EPS growth rate indicates that the company is increasing its earnings over a period, which usually increases its stock price on the stock market. If the earnings growth rate beats analysts’ estimates, the stock usually rises sharply with investors’ price in new information in its stock price.
Sometimes, when a company publishes its earnings reports overnight or after the market closes, depending on the market’s interpretation of the results, its stock price spaces are up or down at the beginning of the next trading day.
For example, if a company reports optimistic earnings and healthy overall financial results, its shares usually lock in the next trading day, meaning investors are willing to buy its shares at a premium. Similarly, if a company reports disappointing earnings and results, its shares usually suffer a beating and plummet. However, this does not always happen this way and many investors are often confused by the backlash to earnings.
HOW TO CALCULATE POTENTIAL STOCK GAINS?
Experienced investors and analysts closely analyze a company’s financial statements and follow developments related to the company in the news to estimate its potential earnings for the next period.
Some companies also provide a guide to future earnings along with their financial results that can be a reasonable benchmark for predicting their potential stock gains. Simply put, you need to consume all publicly available information about the industry and the company to make a competent assumption about its potential earnings for the next period.
We suggest leaving it to professionals. After all, the stock price will be the final arbiter regardless of the ratio or estimate of earnings.