Corporate earnings are perhaps the single most important data point investors study. They reveal a company’s profitability and provide insight into overall market trends. They also have a powerful impact on valuations and stock prices, which is why many traders base their trading strategies around them.
But a lot of folks misunderstand what corporate earnings actually mean. When people talk about “earnings,” they often refer to revenue or gross profit, but the financial world is concerned with net profit—or Earnings Per Share (EPS). This is the amount of money a company keeps after all expenses and taxes are paid, and it’s a key measure of a business’s health and growth potential.
Companies can use their profits in one of two ways: they can reinvest them to improve their products and develop new ones, or they can pass them onto shareholders through dividends or share buybacks. Choosing the right option is critical to long-term investor success.
Earnings reports are an important part of the quarterly cycle that makes up the bulk of trading activity in the markets. When a company announces its earnings, it must disclose specific information about sales, expenses, and net income. Traders and investors look at these reports to identify growth trends, compare them with industry peers, and see how much companies are spending on growth and profitability. In addition, companies often provide guidance on future earnings—which can increase or decrease stock prices depending on the quality of the guidance.