If you’re thinking about getting into the stock market, there’s one word you’ll hear a lot: earnings. Everyone—CEOs, investors, analysts—is obsessed with it. But what are earnings exactly? And why are they so important? Let’s break it down in plain English.
So, What Are Earnings?
Earnings are just a fancy word for profit—the money a company makes after covering all its costs. Here’s a simple way to think about it:
Revenue – Expenses = Earnings (or Profit)
Companies might use different words like net income, bottom line, or profit, but they all basically mean the same thing: how much money the company keeps after paying the bills.
What Is Earnings Per Share (EPS)?
Since companies come in all shapes and sizes, it’s hard to compare their earnings directly. That’s where Earnings Per Share (EPS) comes in. It tells us how much profit is made for each share of stock.
Here’s how it works:
EPS = Total Earnings ÷ Number of Shares
Let’s say two companies both made $1 million:
- ABC Corp has 1 million shares → EPS = $1
- XYZ Corp has only 100,000 shares → EPS = $10
Even though both earned the same amount, XYZ gives more profit per share, so it might be more attractive to investors.
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What Is “Earnings Season”?
Earnings season is like report card time for public companies. It happens four times a year, and companies share how they did financially—how much money they made, spent, and what’s left over.
Most investors pay close attention to earnings or EPS during this time. Before companies report their numbers, analysts try to predict what the earnings will be. These predictions are combined into what’s called a consensus estimate.
If the company earns more than expected, it’s called an earnings surprise, and the stock price often jumps. If it earns less, the stock might drop. It’s all about expectations—sometimes even good earnings can disappoint if they aren’t as good as people hoped.
Why Should You Care About Earnings?
Earnings are a big deal because they usually determine whether a company’s stock price goes up or down. If a company is making strong profits, investors feel more confident, and the price often rises. If profits are falling or missing expectations, the stock might tumble.
But here’s the twist: sometimes stock prices go up even if the company isn’t making money—investors may believe the company will earn big profits in the future. This kind of thinking led to the dotcom bubble. In the late 1990s, people poured money into internet companies that weren’t making much money yet. Eventually, when those profits never came, stock prices crashed.
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What Do Companies Do With Earnings?
When a company makes money, it usually does one of two things:
- Reinvest it – to grow the business by creating new products or improving existing ones.
- Share it with investors – through dividends or buying back shares, which can boost the value of each remaining share.
Smaller companies usually reinvest to grow faster, while bigger, more established companies often pay dividends. Both strategies are fine—it just depends on the company’s goals and your investment style.
Bottom Line
If you’re planning to invest, understanding earnings is key. It helps you figure out if a company is actually making money—and what they’re doing with it. Whether you’re looking for growth or steady income, earnings give you a peek into a company’s financial health and future potential.
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