Earnings and EPS
WhatIF: Earnings helps traders make sense of, and take action during earnings season. "What if..." is the question investors are always asking themselves. "What if oil drops from here?" or "What if the Fed surprises at the next meeting?" or "What if Microsoft beats earnings?"
This app educates investors and helps them understand what is going on in markets – before and after announcements. WhatIF is free and available to all traders at toggle.ai/earnings, the App Store, and the Play Store.
Every public company in the world reports earnings once every 3 months. This quarterly update from the company informs its investors and the public about how business is going - specifically how much money the company has earned (revenue), how much profit it has generated (earnings) and its plan for the next quarter (forward guidance).
A company’s earnings are calculated by subtracting its costs and taxes from revenues. Analysts frequently refer to this value to understand a company’s financial structure and forecast growth. Earnings announcements are the most important recurring events for any stock and traders prepare ahead of an earnings announcement expecting disproportionate price moves. As a consequence, stocks can have regular patterns in the run-up to an earnings release.
One of the ways TOGGLE users can prepare for such moves is through utilizing the new WhatIf Earnings tool. With the help of this tool, users can understand how stocks have historically performed over a 1 week to 1 month period after beating or missing EPS expectations.
If they believe the company will beat earnings, with the help of our tool, a user can understand how the stock might react. On the other hand, if the user believes the company will miss earnings, they already know how much the stock might drop based on historical earnings. Such information helps short term traders with preparing a strategy that has minimum risk in order to earn a quick buck.
Learn more about the WhatIf Earnings tool here.
What is EPS?
Earnings per share (EPS) measures a company’s earnings divided by the number of shares outstanding: measuring how much a company earns per share. EPS is a relative valuation metric which can be used to compare performance between similar companies. Using EPS and the Price of a single share, the Price to Earnings (P/E or PE) can be calculated, which presents the dollar amount an investor can expect to invest in a company in order to receive $1 of that company's earnings.
A company with a higher EPS, compared to a competitor, is said to be of higher value. Analysts predict quarterly EPS for a company and the company’s share price reacts based on if the forecasted EPS value is either met, missed or beat.
If the actual EPS beats the forecasted EPS, it's positive for the company - albeit a beat does not always guarantee a rise in the stock price, oftentimes because the market “was expecting a beat”. On the other hand, missing expectations might be negative for the company but similarly the price might react unexpectedly.
Strong business performance and earnings growth here suggests that historically, the stock powered higher as investors rewarded the company for good business results. On the other hand, weak business performance and earnings growth here suggests that historically, the stock dropped lower as investors punished the company for subpar business results.
One of the key jobs for the analysts covering a company is to estimate its earnings for the upcoming 1-2 years. This estimate gets updated continuously through the year. Sometimes the estimate moves up sharply, thanks to new pieces of information that the analyst uncovered about the company. That is generally considered bullish. On the other hand, new information can also result in estimates moving down, which is generally considered bearish for the stock.
Not only do analysts make predictions about EPS, but also about a company’s revenue and whether this statistic was met, missed or beat. In terms of priority, there is no correlation between one having a more significant impact versus the other. Rather, the reaction of the stock price is based on industry-specific values. For example, media streaming platforms like Netflix would focus on the number of subscribers and large restaurant chains like McDonalds would look at same store sales, to evaluate whether the business is growingHowever, EPS and Revenue are the most basic indicators investors can look at to understand the revenue model, cost structure and profitability of a business
Data on TOGGLE
On TOGGLE you can find many datapoints about earnings, let’s review them
- Forward EPS: the expected EPS for the next 12 months (example)
- Trailing EPS: the EPS for the last 12 months (example)
- EPS 12M forward growth: the percentage difference between Forward EPS and Trailing EPS. For example, 10% means means that EPS are growing 10% over the next 12 months (example)
- Forward EPS 3M change: the change in forecast forward over the last 3 months, if it trails higher it means analysts are becoming bullish on the stock (example)
- EPS $ surprise difference: the positive or negative surprise in earnings for the stock vs expectations (example)