Fundamental Valuation Indicators

Earnings and EPS

In short, earnings are the profit of a company: revenues minus costs and taxes. The after-tax net income earned by a company (found on the income statement) is referred to earnings. Analysts frequently refer to this value to understand a company’s financial structure and forecast growth. This value is calculated by subtracting a company’s costs and taxes from its revenue, every quarter or fiscal year.

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. 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, its positive for the company - albeit a beat does not always guarantee a rise in the stock price, oftentimes because 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.

Earnings announcements are the most important recurring events for any stock, taking place with a quarterly cadence (usually). 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 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)

Earnings and EPS

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