Corporate earnings tell the story of a company’s ability to attract and retain investment capital, while also revealing broader market and economic trends. Earnings reports from publicly traded companies are closely watched by investors, analysts, news headlines, and even central banks. They are one of the most important pieces in connecting market valuations to actual results and influencing how companies grow in the long run.
The most common metric tracked is Earnings per Share (EPS), which is calculated by dividing a company’s net profit by the number of outstanding shares. This figure can be skewed by a variety of factors, including whether a company is reinvesting profits or passing them directly onto shareholders as dividend payments. A company that is reinvesting its profits can expect to see its stock prices rise as it adds to its operations. Conversely, a company that is passing on its profits as dividend payments will likely see its stock price decline as investors take fright.
Beyond EPS, earnings reports reveal a myriad of other key metrics including revenue and margins. A company’s ability to generate revenue reflects its ability to attract and retain investment capital, while its margins offer an indication of how well it is managing costs. In addition, the earnings reports of large companies can have a significant impact on overall markets and economic trends as investor confidence in a sector can be swayed by a single set of numbers.
However, while earnings reports are a critical piece of the puzzle, they can be misleading. For example, an accounting rule that requires a company to value its assets at their historical cost rather than their current market price can cause a company’s reported earnings to appear higher than they actually are.
