All about Earnings – an investors viewpoint
Earnings estimates are anything but perfect. But many investors watch them closely as they play a role that is important in measuring valuation of a company’s stock. The stock performance is being measured by the investors through the earnings power of the company. They seek the sound estimate of the current year and then the next year’s Earnings per Share (EPS). This is done so that they can make an assessment of how much a company will be earning in the future.
This is the reason large firms and brokers employ stock analysts in their company.
The market judges the stock performance using earnings estimates. They mean a lot to the investors. Most of them rely on the performance on how much the company earns. Their investment decisions are made based on it. Beating or meeting the estimates is one way by which a company is assessed.
You maybe are wondering as to why the focus in investments is on earnings instead of the other things like cash flow or sales?
Valuing the stock in free cash flow doesn’t give a true picture of a companies profitability and sales can be misleading when profitability is not accounted for.. Earnings are more reliable, accurate and a more convenient measure.
Now this is where the analysts come into view. The earnings forecasts that they make are based on their expectations of the profitability and growth of the company. The good analysts incorporate factors that are top-down like the rates in the economic growth and currencies. Macroeconomic factors are also incorporated especially when they can influence the corporate growth. They even talk to the suppliers, competitors and customers just to gain full understanding of the company assigned to them.
A forecast made by an analyst is critical for they have big contribution in the valuation model for the investor.
The earnings estimates very powerful. Even a small deviation is capable of sending a stock lower or higher. When a company has exceeded the earnings estimate, they are usually given the reward of an increase in the stock price. When they happen to fall short, the share price may take a hit.
With the investors closely watching the estimate numbers, a difference between earnings estimates and the actual is one of the most important factors that drive the performance’s share price in the short term.
The community in investments relies mostly on the earnings as its primary metric. The judgement given to stocks are not just based on their capability to increase their earnings but the capacity they have to beat or meet the estimates on earnings are also considered. Investors are bound to keep an eye on it whether you like it or not.
written by Al Cheadle