It is all about the Company’s Earnings!
Starting with the fundamental revolving around the company’s earnings, most investors would undoubtedly say it is the evaluation of the stocks. One can understand earnings simply as the company’s profit that is a measure of how much money it made in any given period (that may be a month/quarter/year).These reports are a manner to make way for everything else associated with the organization’s business.
All earnings reports have a certain specific meaning owing to specific conditions. One cannot say that the reports for ‘small and rapidly growing companies’ are meaningless and have not much value. Rather, the case might be quite the reverse.
Earnings are an estimation ofthe investors’ opinion on factors such as the demand, growth, industry competition, cost control and the profit margins. With a change or contradiction of these expectations, the company stock prices have to adjust themselves in accordance.
Investors expect big and well-establishedcompanies’earnings to show positive earningsresults. Even if a negative drop occurs for such companies, it may affect stocks. However, it may be just a one-time event.
On the other hand, talking about young companies one may observe a negative earning to go on for years, yet enjoying the market favors. This will only be the case if its investors have a belief in the company’s future.This is one reason why one should not overlook the under-tracked (small and mid-cap) companies as a kind of value addition.
Therefore, in addition to the actual earnings, it is also their expectation that is a positive factor. The company’s stock will seem to stumble if it falls short of expectations, even though it may have reported positive earnings for the last quarter.One can look at ‘earnings’ as the growth measured towards positive earnings. The quarterly reports of listed companies tell about their overall health, and if it may pay the dividends or grow towards higher stock price (capital appreciation).
EPS or Earnings per Share, is the basic measurement of company’s earnings. This divides the earnings, with respect to the outstanding share count. The only reason to reduce earnings to a per share basis is to show the division of profits, facilitate comparison with other companies.
You deduce the downtime based on the measurement of earnings per share as one of the following:
- Trailing Earnings per Share: for the previous year
- Current year
- Forward Earnings per Share: for the coming year
Investors might also sometimes use other tools for evaluation of stocks, but the quarterly reports of companies remain the ultimate starting and ending points for assessment.
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