Corporate earnings are a key piece of information for market participants, whether they are investors, consumers, or simply interested in how the economy is performing. When earnings reports are out, they can spur positive sentiment when they beat expectations or negative sentiment if they miss them. This makes them important for everyone from the Bureau of Economic Analysis to individual companies and their shareholders.
Essentially, earnings per share (EPS) shows how much profit is left after all of a company’s expenses have been deducted from revenue. It is typically reported on a basic and diluted basis, with the latter including shares of stock that have not yet been issued or sold. EPS is also the basis for important valuation metrics like the price-to-earnings ratio. Finance teams calculate EPS as part of their internal financial reporting, forecasting, and strategic planning, while analysts use it to compare profitability across companies or over time.
When analyzing earnings, be careful not to overreact to one-time events or to make assumptions based on limited data. For example, a company might report EPS growth, but this may be due to a reduction in outstanding shares through stock buybacks rather than actual profit growth. It’s important to look at adjusted EPS or EPS from continuing operations, which excludes one-time items and excludes the impact of discontinued operations. It’s also helpful to evaluate EPS on a yoy basis rather than a quarterly basis. This allows you to see if the company is truly growing its profits and not just adjusting its costs to match the market.