Corporate earnings are a key indicator of business performance and a major driver of stock prices. Earnings are also called profits, net income, bottom line, and a whole host of other names. While the details behind accounting can get complex, in a general sense, earnings are what remains of a company’s revenue after all expenses have been deducted. The most important part of a company’s earnings report is the number that gets the most attention: earnings per share (EPS). To determine this figure, a company’s net income is divided by its outstanding shares. This tells investors how much profit each share is worth.
Growing earnings are a great sign that a company is on the right track to providing a return for investors. Many companies choose to reinvest their profits in the business to grow even more, while others pass on the proceeds to shareholders via dividends or share buybacks.
Publicly traded companies are required to disclose their financial results quarterly to ensure transparency in the markets. This disclosure is known as “earnings season.” Investors and traders alike pay close attention to the numbers and the guidance provided by management. This is because these reports are the only direct link between a company’s financial results and its valuation, making them a critical piece of information for informed investing. Good earnings can send stocks shooting up, as folks rush to buy, while bad earnings can cause prices to plummet as people sell to cut their losses.