Corporate earnings are the monetary profits earned by private sector businesses, and they make up the majority of the economy’s output and employment. These profits incentivize companies and consumers to continue producing and spending, and thus drive economic growth. Publicly-traded companies report earnings on a quarterly basis, and their results are closely watched by market participants and the media.
Investors focus on a company’s earnings per share (EPS), which represents how much profit is allocated to each outstanding share of stock. Higher EPS indicates that a company is growing, while lower EPS indicates a decline in profit. In addition, investors use a variety of other metrics to evaluate a company’s performance, including revenue, margins, and forward guidance.
Earnings are calculated by subtracting all operating expenses from total revenues, and then dividing by the number of outstanding shares of stock. When a company issues additional shares of stock, this increases the total number of outstanding shares, and therefore decreases the per-share profitability of a company. Therefore, companies that issue additional shares are often required to report diluted earnings per share.
Investors should be careful not to overreact to earnings results, especially when those results come in below or above expectations. A number of factors can distort a company’s earnings, including one-time gains or losses, the sale of a business unit, and asset write-downs. Using adjusted earnings can help to remove these temporary factors from the calculation, and compare a company’s actual performance to its peers.
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