Earnings Reports and their Importance in Investing

It is no secret that no investor or stock markets trader can make it far in this industry without having a clear understanding of what corporate earnings reports are. It is extremely important to know how to read those well, in order to take the best decisions and adjust your strategies accordingly.

Profits – Revenue vs Income

It should be noted that there is a difference between the meaning of these two words. Often times people are mistaking one for the other and this can lead to a lot of confusion.

Revenue means the total amount of money that the company received through selling products or services.

Income, “profits” or “net profits” refers to the total amount that a certain company generated from selling product or service, minus the costs of production per that product or service.

Earnings Per Share (EPS)

This metric is often used by the media agencies to describe a company’s earnings. Typically, analysts and investors will use a company’s earnings per share to compare corporate profits, as this metric provides a better view for investors rather than just looking at the profits figures.

This index is calculated by dividing the remaining profits of the shareholders divided by the number of outstanding shares. Since the number of shares owned by people varies from one company to another, and often times the number of issued shares differs over time, companies may use an average of outstanding shares when performing this calculation.

Earnings Report Season

Companies issue earnings reports four times a year, as they are required by law to issue earnings reports on a quarterly basis, by filling a 10Q form. They are also allowed the option to issue the earnings reports based on their financial calendars.

It should be noted that the profit per share is one of the most important factors that companies use in their reports, since it attracts a lot of attention and media coverage.

Prior to releasing the reports, stock analysts issue their forecasts on what the profits might be. If the profit report turns out to be higher than these expectations, it is called a “beat” and it is very common to see a growth in the company’s stock prices.

If, on the other hand, the earning reports statistics are lower than the expectations, it will be called a “miss” and the stock prices usually go down accordingly.

The importance of profits to investors

The profits section from earning reports is very important for investors, as they can offer a glimpse into how their investments are doing. Also, a strong earnings report more often than not leads to a growth in the company stock’s price.

Sometimes, even though a company considered to have strong stocks might not gain much money at the time when the report comes out, the investors are counting on the fact that on long term they will gain a bigger return on investment based on the reliability of the company.

When a “boom” happens, so when a certain stock starts seeing huge growth in a relatively short amount of time, all traders become excited about the potential profit and thus they start buying. This causes the stock prices to rise even further. In case the boom doesn’t help the stocks to achieve the expected gains, the market will not be able to support the high volatility, and thus the stock may collapse.

When a company gains profits, it has two options for moving forward:

The first option is to reinvest the profits, and develop new products. In this case, the investors also benefit from these reinvestments, as on the long run if the management made the right choices they will see a further increase in the values of their shares.

The second option is to distribute the profits equally to shareholders in the form of dividends. In this situation, investors can see the gains on their portfolios immediately and benefit from the profits.

Corporate Earnings Reports are the most important indicator of a company’s financial health. Growing profits are a huge sign that a company is on track to providing significant returns to its investors.

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