If you’ve spent any time in the stock market or followed financial news, you’ve probably heard about corporate earnings. But many investors may not have a clear understanding of what these terms mean or how they work.
Earnings refer to the amount of profit a publicly-traded company makes over a specified period, typically a quarter or year. Companies are required to report their earnings to the public, and these reports usually include key metrics like revenue, net income, and EPS.
EPS stands for “earnings per share.” This metric divides a company’s net income by the number of shares outstanding. This figure can be broken down further into basic and diluted EPS to account for different share counts. Basic EPS uses only the current outstanding shares, while diluted EPS takes into account potential future shares from employee stock options, convertible debt, and other instruments.
A rising EPS figure suggests that a company is growing its bottom line without significantly increasing its share count. This could indicate strong demand for a product or service, or it could be a sign of cost-efficiency gains. Conversely, a falling EPS figure may suggest that a company’s expenses are rising faster than its revenues.
Corporate profits are closely tracked by investors and regulators alike, and they provide a window into a company’s financial health and long-term potential. During earnings season, companies often issue forward-looking guidance and make special announcements that can drive market reactions. In addition to reporting quarterly earnings, the Bureau of Economic Analysis (BEA) releases revised yearly EPS figures for all private and public corporations in the U.S.