Corporate earnings are a critical measure of company financial health and, in turn, economic growth. Earnings, also called profits, are company revenues minus expenses. They incentivize companies to invest in their business and grow, and they also give consumers the funds they need to spend on goods and services. Collectively, earnings are a major driver of the economy and one of the primary indicators central banks use when making policy decisions.
Generally, investors focus on three main data points in earnings reports: revenue trends, EPS, and forward guidance. These metrics provide important insights into a company’s future potential and are key factors in determining stock prices.
Earnings per share (EPS) is the net profit for a company divided by the number of shares outstanding. This metric is useful when comparing companies in the same industry as it allows for direct comparison of profitability. EPS can be calculated on a basic or diluted basis, with diluted EPS factoring in the effect of stock options, convertible securities, and other instruments that could increase the number of shares outstanding.
Ultimately, company management has two choices with regard to how they allocate their profits: either reinvest them in the business to create long-term value or distribute them to shareholders as dividends. Typically, smaller companies choose to reinvest their profits in the hopes of growing the business and generating more future returns, while larger companies prefer to pass on some of the wealth they have generated to shareholders in the form of dividend payments.