All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Earnings might be what you call your salary, wages, or income – but for investors, it’s an important metric used to judge the performance of stocks. If you’ve been investing for a while, you may have come across terms like “earnings season”, or explored the idea of using an “earnings calendar” to plan your moves.
Earnings are an important concept to get your head around if you want to evaluate companies properly, but earnings are often described in complex terms. So we’re going to break everything down and explain all the key details. We’ll also show you how to use vital tools and research to improve your skills, along with an “earnings surprise” revelation thrown in for good measure.
What are earnings?
This is the name used to describe the profit a company makes. The simplest way to work out earnings is to subtract a company’s costs from sales revenue. Most of the information you need should be on any income statement.
Earnings are reported quarterly (every 3 months), but there’s flexibility for companies to decide exactly when they want to report them (within a time window).
There can be plenty of accounting nuances to understand once you dig into the details, but this general explanation is a good place to start and build from. You may also see earnings called:
- Net income
- Bottom line
Income statement basics
The income statement gives you a look at the revenue and expenses of the company. This includes operating revenue (the revenue made from primary activities), non-operating revenue (the revenue made from non-core business activities, such as interest from capital) and gains (the money made from the sale of long-term assets, like a vehicle).
“Revenue” doesn’t mean the money is in the bank (known as receipts). For example, a TV production company might recognise the revenue from a TV series when the first episode is aired, as once the series has started, the company is almost sure it’ll get paid. But it may not receive the money until the full series has been aired.
The expenses are the costs of the business to operate. This includes the cost of goods sold, depreciation, amortisation (recognising the decline in value of an intangible asset – more on this below), administrative expenses, employee wages, commissions and utilities.
You’ll see some figures as “gross” (all the money received) and some as “net” (what’s left after expenses are deducted).
Depreciation vs amortisationDepreciation. This is a method of allocating the cost of a tangible asset over its useful life. It’s kind of like buying a car you know you’ll use for 5 years for £1,000 and saying “It’s basically £200 per year.”
Amortisation. This is a technique used to lower the value of a loan or intangible asset (an asset that isn’t physical, but is still valuable) over a set period, such as to spread out loan payments. With assets, it’s where you expense the cost of an intangible asset over the course of its projected life.
Why are earnings important?
Earnings give you a straightforward way to look at how much money a company is making. Having quarterly earnings reports is helpful for several reasons:
- You can compare earnings results with competitors or similar companies.
- It gives you a reference point to see how a stock is performing compared to the same period in past years.
- It’s a simple way to see if a business is growing.
- You’re able to look for any cyclical patterns (for example, making more money during particular times of the year).
For an investment to be worthwhile in the long term, it needs to make more money than it spends. Evaluating a stock’s earnings gives you a useful snapshot of the business, like taking its pulse. You can quickly check if the pulse is growing stronger, or if it’s fading.
What is EPS?
EPS is “earnings per share”. It’s a calculation that allows you to measure and compare the earnings of different companies in more of an “apples vs apples” comparison.
Looking at the raw figures is obviously helpful, but breaking earnings down to the EPS format simplifies evaluating a stock.
If you’ve come across “price-to-earnings ratio” or “P/E ratio” when you’re attempting to value a stock, the “E” in P/E ratio refers to a stock’s EPS.
A helpful way to picture EPS is to think of it as a piece of nutritional information on food packaging. When you look at the nutritional content, you’ll see that each element is usually broken down by “per 100g”, for an easier comparison. Working out the EPS shows you how much profit each share of a company makes, allowing you to compare stocks with varying amounts of shares.
How to calculate EPS
You can calculate EPS (earnings per share) by dividing the total earnings (or net profit/income) by the total number of outstanding shares. It’s as simple as that.
The calculation gets slightly more complex when you have to consider things like depreciation and tax before getting your earnings figure. But the overall sums aren’t too complex.
We’ve shown below what EPS can look like in real-world terms.
Scenario: Jerry’s Cans
The fictional company Jerry’s Cans sells various types of tinned foods. During the last quarter, here’s what the income statement looked like:
|Net sales revenue||£1,500,000|
|Cost of sales||£750,000|
|General and administrative expenses||£75,000|
|Total operating expenses||£175,000|
|Net income (earnings)||£575,000 (gross profit minus total operating expenses)|
Jerry’s Cans has a total of 200,000 outstanding shares. So, calculating the EPS for Jerry’s Cans in the last quarter goes like this:
£575,000 (net income/profit) ÷ 200,000 (number of outstanding shares) = £2.88 EPS
Keep in mind this is a simplified version just to show you the basics. There can be other factors that you’ll need to take into account, depending on the complexity of the business. This usually involves taxes, interest, depreciation, and amortisation.
What’s a good EPS?
This is a tough question to answer with a defining figure. Partly because it can vary across sectors and industries. Different types of stocks will have contrasting market expectations for EPS.
Typically, the higher the EPS, the better. A high EPS means a company can be thought of as profitable. However, when you’re researching a stock, EPS growth can also indicate that the company could be a worthwhile investment.
It’s wise to use EPS alongside other metrics when judging how well a stock is currently performing.
The difference between expected EPS and actual EPS
An expected EPS will be a projection made by analysts or the company itself. Naturally, this can differ from what ends up being the actual EPS for a stock.
When this happens, it can affect the share price positively or negatively. This is because the firm became more, or less profitable, than people expected.
What is earnings season?
Earnings season is a period each quarter (every 3 months) when publicly listed companies on a stock exchange report quarterly (or annual) earnings.
It’s a time when shareholders and prospective investors can check in on a stock’s recent performance. It lets you see whether a company has met, exceeded, or failed expectations.
When is earnings season?
Although this comes around each quarter, the exact dates can be flexible. There’s no hard and fast rule that companies must report earnings on a specific date. So what tends to happen is that there will be a period (a short season) where companies release their earnings in a slightly staggered format.
Some companies will release figures immediately, within a couple of weeks of a quarter’s end; others wait up to 6 weeks to release earnings. This can be a strategic move, or simply because the accounting process is complex.
What you’ll notice is that the busiest periods are usually:
- Mid-January – end of February
- Mid-April – end of May
- Mid-July – end of August
- Mid-October – end of November
If you’re holding a diversified portfolio of stocks, you might find that results for your investments are trickling through all year round, rather than in strictly defined earning seasons.
Why is earnings season important?
Earnings season is an opportunity for investors and the market to get an update and an insight into how well a company is performing. Since companies generally measure success through the level of their profits, this is investors’ chance to see how well that’s going.
A major benefit of investing in publicly listed companies is that this financial information must be reported. As an investor, it allows you to make more informed decisions about whether to buy or sell a stock.
What happens to the market during earnings season?
You’ll often find that this is a noticeably volatile time for individual stocks and the market as a whole. Larger companies don’t tend to see huge share price movements (unless they have spectacularly good or bad earnings results). But for smaller companies, one quarter can make a major difference.
How to benefit from earnings season
The increased volatility can provide some excellent opportunities for investors. For example, the market tends to react disproportionately to earnings results.
Earnings season can lead to exaggerated moves up or down for share prices, like a knee-jerk reaction from the market while the information is first digested.
If you follow earnings seasons closely, you can take advantage by using an earnings calendar to track all your investments. Knowing when a company will release its earnings means you can keep an eye out for buying and selling windows.
If a stock releases fantastic earnings, you may be able to sell that investment at a higher price than what you think the stock is worth. On the other hand, poor earnings could lead to undervaluation of a stock, presenting you with the chance to buy shares and pick up a bargain.
Take a look at our regularly updated earnings calendar below to see the latest info and EPS for a wide range of stocks:
What is an earnings surprise?
When the results and profits made public during earnings season are significantly higher or lower than the projections or analyst expectations, that’s known as an “earnings surprise”.
It’s notoriously tricky to be spot on when predicting earnings. But when earnings are way off the prediction (positively or negatively), this tends to raise questions.
Sometimes estimates can’t factor in unexpected events or unforeseen circumstances. In most cases, beating earnings estimates can lead to a jump in the share price, and failing to meet expectations usually results in a stock price drop. But that’s not always the case.
Understanding a company’s earnings is an extremely useful skill if you want to become a successful investor. It’s a check-in on how well an investment is performing from quarter to quarter and year to year.
Earnings calculations can vary in complexity, but there are plenty of resources online and on investing platforms to find out this information without crunching all the numbers yourself. It’s well worth being aware of the different earning seasons throughout the year because they can heavily impact the short-term price movement of a stock. If you want to make the most of these periods, consider using tools like an earnings calendar to keep track of stock performance in real time.
Frequently asked questions
More guides on Finder
How to buy Casper Sleep shares
Ever wondered how to buy shares in Casper Sleep? We explain how and compare a range of providers that can give you access to many brands, including Casper Sleep.
How to buy Lowe’s Companies shares
Ever wondered how to buy shares in Lowe’s Companies? We explain how and compare a range of providers that can give you access to many brands, including Lowe’s Companies.
How to buy John Wiley & Sons shares
Ever wondered how to buy shares in John Wiley & Sons? We explain how and compare a range of providers that can give you access to many brands, including John Wiley & Sons.
How to buy DraftKings shares
Ever wondered how to buy shares in DraftKings? We explain how and compare a range of providers that can give you access to many brands, including DraftKings.
How to buy SpartanNash Company shares
Ever wondered how to buy shares in SpartanNash Company? We explain how and compare a range of providers that can give you access to many brands, including SpartanNash Company.
How to buy Xtrackers FTSE 100 Income UCITS ETF 1D
Ever wondered how to invest in XUKX ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.
How to buy iShares Core MSCI Japan IMI UCITS ETF USD Acc
Ever wondered how to invest in SJPA ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.
How to buy Lyxor Core MSCI Japan DR UCITS ETF Daily Hedged to GBP Acc
Ever wondered how to invest in LCJG ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.
How to buy SPDR FTSE UK All Share UCITS ETF Acc
Ever wondered how to invest in FTAL ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.
How to buy Franklin FTSE United Kingdom ETF
Ever wondered how to invest in FLGB ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.