Corporate earnings are the foundation of stock prices and a key indicator of economic health. When companies are more profitable, they can invest more money into building their business, driving future growth and in theory creating jobs and boosting the economy in classic trickle-down fashion. Investors and the media are keenly focused on how well businesses are doing, with some headlines suggesting that the recent tax cuts will boost earnings going forward.
However, the numbers behind these reports aren’t always accurate or easy to understand. Often, the results are distorted by accounting rules and one-time gains or losses that can inflate profits and make them look healthier than they really are. It’s not intentional fraud or manipulation, but rather the result of a system designed decades ago with good intentions that has since left some blind spots.
The most important numbers to look at in an earnings report are revenue trends, EPS and forward guidance. Investors and long-term traders focus on these metrics to gain insights into a company’s stability, growth potential and profitability. They can also help gauge a company’s efficiency in managing costs and operational efficiency.
Earnings are calculated as company revenues minus all expenses, and they represent the amount of profit that is left over after covering operating costs. Companies are required to disclose their earnings on a quarterly basis, and they can be volatile. This is due to the fact that investors and the media closely follow these results and react to them, which in turn can sway market indices like the S&P 500.