Understanding corporate earnings and how it can affect investment decisons

KALAMAZOO, Mich. - Nov. 17, 2015 - PRLog -- To make well-informed investment decisions, you need to know a variety of factors about each investment you are considering. It’s important to consider more than just a stock’s current price – you’ll also want to understand its valuation, or fair market value; its ability to grow dividends over time; and its performance in various economic climates. One other term you may have heard about is “corporate earnings.” This key financial measurement, when used in conjunction with other variables, is essential for evaluating stocks.

What are corporate earnings?

A company’s earnings are its sales minus its costs for production. The terms “profit,” “net income,” “bottom line” and “corporate earnings” are essentially interchangeable.

Why are investors interested in corporate earnings?

Investors are primarily interested in corporate earnings because earnings generally drive stock prices. Strong earnings typically push stock prices up while weak earnings can drive prices down. However, a company’s stock price may rise even if the company isn’t making much money; this happens when investors think the company will someday be profitable.

What does a company do with its earnings?

A company can reinvest its earnings to expand its business or pay dividends to shareholders.

What are “earnings per share”?

A company’s profits divided by its number of common outstanding shares (the shares currently owned by investors) is its earnings per share (EPS). Investors use this figure to compare the earnings of different companies. For example, suppose Company A and Company B both have earnings of $10 million. If Company A has 1 million shares outstanding, its EPS is $10 ($10 million/1 million shares). If Company B has 2 million shares outstanding, its EPS is $5 ($10 million/2 million shares).

An Edward Jones financial advisor can provide you with more information on evaluating stocks and using this knowledge in your investment decisions.