Corporate earnings are the bottom-line results of a company’s core business operations. They include revenue (sales), operating expenses, and taxes. The most important metric is net income, which is the total amount of money a company keeps after subtracting all costs. This figure is used to calculate a company’s earnings per share (EPS), which portrays how much profit each share of stock earns. EPS is a key driver of stock prices.
In addition to reflecting a company’s profitability, corporate earnings reveal broader market and economic trends. For example, strong or weak earnings may indicate shifts in consumer behavior or technological innovation. In turn, these trends can affect the overall economy.
The most important factor for traders and investors is whether a company’s earnings meet or beat analysts’ expectations. When a company’s earnings beat expectations, the stock price usually rises. In contrast, when earnings miss expectations, the stock price usually declines.
While earnings are an essential metric, they can be misleading. For example, companies may use historical cost accounting rules to overstate their profits. This is because these rules require that companies value assets based on their original purchase price, not their current replacement cost. If inflation is high, this can result in a large gap between reported and real profits. To avoid this trap, investors should look at adjusted earnings, which exclude one-time gains or losses. They should also compare a company’s net income year-over-year to see if its earnings growth is real or the result of financial engineering.
