Corporate earnings, also known as profit, are a key indicator of company financial health and one of the most important factors that impact stock prices. These numbers are reported by publicly traded companies on a quarterly basis and are scrutinized by investors and traders alike.
In its simplest form, corporate earnings are the monetary profits that a business generates from sales minus expenses. These profits incentivize businesses and consumers to continue producing and spending, which helps drive the economy forward. Many publicly traded companies reinvest their profits or pass them on to shareholders in the form of dividends or share buybacks. In addition, the Bureau of Economic Analysis (BEA) reports aggregate corporate profits as part of gross domestic product (GDP).
The exact formula for calculating a company’s net profit may vary slightly by accounting practice, but the basic calculation is the same: a firm’s revenue minus its costs and taxes divided by the number of shares outstanding. This figure, referred to as Earnings per Share or EPS, is the metric that most investors are concerned with and focus on when analyzing a company’s earnings report.
When evaluating earnings reports, it is important to take into account one-time events that can temporarily inflate or deflate a company’s profitability. Additionally, it is important to compare a company’s earnings year-over-year to discern whether its earnings growth is organic or the result of financial engineering (i.e. share buybacks). For this reason, it is advisable to look at adjusted earnings numbers that exclude these items.