Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Earnings

What it is:

Earnings are the corporate profits of a company over a specific time period after taxes and other expenses have been paid.

How it works (Example):

The net (after-tax) earnings of a company are calculated by deducting such factors as operating expenses, cost of sales, taxes, and the like. Company earnings figures are usually released on a quarterly basis, but may also refer to annual earnings.

Earnings are, in many cases, the most important factor determining stock prices for a company. For example, company ABC releases information that earnings for the third quarter (Q3) have risen from $10,000,000 to $20,000,000. At the same time, company XYZ releases figures showing a drop in earnings for the same period from $900,000 to $750,000.

Why it Matters:

Earnings are probably the single most important indicator of a company's financial strength and growth potential. Earnings figures are used by investment analysts to provide estimates of a company's growth potential and offer target price estimates for investors interested in purchasing shares. Many new companies may report low, or even negative, earnings whilst attempting to find market potential for a particular good or service, and yet receive positive estimates from investment analysts for the simple reason that investors believe the company will grow in the near future.

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