Earnings Estimates

What are Earnings Estimates?

An Earnings estimate is regarded as the estimate for the future annual or quarterly Earnings Per Share of a company. Majorly, this estimate is calculated and published by an analyst. Undeniably, the future earnings estimate is the most important input when it comes to figuring out the value of a company.

By putting this estimate on the earnings of the company for a specific period, be it quarterly, annually, or monthly, analysts can easily bring out the approximate Fair Value of the firm, with the help of cash flow analysis. And then, this provides the target share price for the company.

Understanding Earnings Estimate

To come up with an approximate earnings estimate, analysts use management guidance, fundamental information, and forecasting models associated with the company. Considering that a majority of Market participants rely upon earnings estimates to assess the performance of the company; thus, it has to be quite accurate.

Often, the earnings estimates provided by analysts are the aggregate to generate consensus estimates. These get used as the benchmark against which the performance of a company is monitored and gauged.

However, if the company misses this consensus estimate, either by earning less or more than the estimation, the situation is known as earnings surprises. Generally, companies manage their earnings cautious to make sure that consensus estimates don’t get missed.

As per the research, it has been demonstrated that the companies that consistently beat their earnings estimates end up outperforming the market. Thus, certain companies may set their expectations at a lower scale by providing forward guidance that makes the consensus estimates relatively lower in comparison to estimated earnings.

As a result, the company gets an opportunity to beat consensus estimates consistently. In case this situation occurs again and again, then the earnings surprises start decreasing considerably.