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What are Earnings?

Earnings, Earnings Season, Stock earnings

Earnings, Earnings Season, Stock earningsIn this article, more didactic than practical, I will touch one of the most important and delicate arguments for traders in stocks and options; I refer to earnings.

Since we are in the full of the earnings season, it seemed appropriate to focus my attention on this issue. But let's take a step back and start with the basics.

 

What are Earnings?

When we talk about earnings, we refer to the profits realised by a company. They are usually released quarterly and, as mentioned earlier, the month of November is one of the most important months for traders.

While shareholders focus on dividends, options traders focus their attention on earnings.

The net earnings, in brief, are the difference between the total revenues generated by the company and the total expenses (included operating expenses and taxes) it sustains in a period of time (usually a quarter or a year).

But what is the difference between earnings and dividends?

Earnings measure the actual amount of money remaining on the company, taking into account management costs and paid taxes. So, they show how profitable a company is. Dividends are the part of profits that a company decides to distribute to the shareholders.

 

How do you calculate Earnings?

I must point out that it is not necessary to make this calculation. This kind of news is provided by several websites that deal with the financial sector, but for your knowledge and learning, you can find a practical example below.

  • The gross sales of a company are $ 500,000 for a year, while the cost of sales is $ 300,000.
  • Making the difference GROSS SALES – COST OF SALES, we get $ 200,000.
  • The operating expenses (including depreciation) are $ 80,000, and taxes $ 20,000. The result is the company's earnings (profit, net income) are $ 100,000.

Then, about profits, the company will choose how much will be distributed to shareholders (dividends), how much it will be used for funding, and how much will go into the cash reserves.

 

Where can we see the Earnings Data?

As mentioned earlier, there is no need to make so many calculations to know how to behave upon the arrival of the news. This because technology and websites tell us all we need to know about the companies' earnings. Like for example stockearnings.com, the free website that I often consult.

But why are the earnings so important for trades?

Simple, because the price of the share varies according to the production of the company, so, all the positive or negative news related to production makes the price move the share price.

Earnings are an important indicator of company health because investors base investment decisions on earnings, and stock price is based on earnings.

 

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