Corporate earnings are a major talking point for investors and traders. A quick Google search for “corporate earnings” will net you about 400 million results in half a second. In this article, we’ll explore what corporate earnings are, how they impact stock prices, and why they matter for the economy at large.
Essentially, corporate earnings are the amount of money a publicly traded company makes after all expenses are paid. This figure, which is reported quarterly, is divided by the number of shares to produce a metric known as Earnings Per Share (EPS).
In general, higher EPS will lead to rising stock prices, while lower EPS will lead to falling stock prices. Corporate earnings are also important because they reveal broader economic trends and can be used to predict future trends. For example, higher EPS will often lead to economic gains worldwide, while declining earnings will usually lead to global economic declines.
Finally, corporate earnings are important because they are required by law to be disclosed on a regular basis. This allows for transparency and fairness in the financial markets.
However, the numbers that are published by companies during earnings season can sometimes be misleading. This is not because of fraud or malfeasance, but rather because of accounting rules that have been in place for decades. The most common culprit is a practice called historical cost accounting, which basically says that when a company purchases an asset, it must record the price at which they purchased it, regardless of how much that asset is worth today.
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