Earnings for All Seasons
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To understand the importance of earnings, we need to remember that the value of a company can be tied to the amount of money it earns. Some companies don’t have earnings and they are valued based on their potential, not current earnings.¹
Wall Street analysts maintain a close pulse on a company’s quarterly report to help estimate future earnings. For example, these estimates may guide investors in determining an appropriate price for a company’s stock.² Remember, a company is not permitted to discuss interim earnings with select individuals; earnings reports must be disseminated publicly to level the playing field for all investors.
An Inside Look
When earnings reports are released, it tells the market two things.
First, it offers an insight into how the company is performing, and what its prospects may look like over the near term.²
And second, reports can serve as a bellwether for companies that still have not reported. For instance, if the earnings of a leading retailer are strong, it may offer an insight into the earnings of other retailers, as well as other companies that similarly benefit from higher consumer spending.
Earnings reports are generally released when the market is closed in order to provide market participants adequate time to digest the results. Earnings reports may move markets. If earnings diverge from the expectations of professional investors and traders, then price swings—up or down—may be significant. Such divergences are referred to as an “earnings surprise.”
If you are a “buy-and-hold” investor and remain confident of the company’s long-term prospects, earnings season may mean little to you since short-term results may not always be indicative of long-term outlook. However, it can be meaningful if an earnings shortfall reflects a structural problem with the business, or represents the continuation of a downward trend in earnings.
- Past performance does not guarantee future results. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
- This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG, LLC, to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 Faulkner Media Group.