Earnings

What are Earnings?

Typically, earnings are referred to as the after-tax net Income. Sometimes, they are also known as the company’s profit. Earnings are the primary aspect to determine the share price of a company as they can indicate if the business will be successful and profitable in the long run.

Perhaps, earnings are essential and most studied numbers in the financial statements of a company. With this, profitability, the performance of the company and the comparison between the company and its competitors can be comprehended.

How is it Used?

Basically, earnings are such profit amount that a company generates during a certain period. Usually, this period is defined as either a quarter or a year. At the end of every quarter or a year, analysts look forward to the release of the earnings of companies.

And then, these numbers are studied with an objective to figure out the performance of every company. Reported earnings, if get deviated from the expectations of analysts, can have a substantial effect on the stock price.

For example, if an analyst estimates the earnings to be Rs. 10 per share; however, they turn out to be Rs. 5 per share, the stock price may likely fall. The companies that outperform the estimations of the analysts get more favour by investors.

Contrary to that, a company that misses the estimates of the analysts might be considered as a risky investment. However, there are always exceptions. For instance, back in the early 2000s, Amazon missed its estimations for several quarters when it was developing its business units. However, investors could still figure out its long-term potential and continued Investing in it.

Factors to Measure Earnings

Earnings Per Share

Earnings Per Share (EPS) is a common ratio that is used to represent the profitability of the company on the Basis of per-share. It can get calculated by dividing the total earnings of a company by the outstanding number of shares.

Price-to-Earnings

Commonly, price-to-earnings is used in the valuation measures. This ratio is calculated as share price divided by the earnings per share. This formula is used to figure out the values for earnings of different companies operating in the same Industry.

Earnings Yield

The earnings per share, or the Earnings Yield, for the recent 12-month period is divided by the current Market price of per share to find out the earnings.