Good earnings per share, or EPS, in the stock market depends largely on expectations. Both Wall Street analysts and corporate executives generally identify a number or range expected for profits, or earnings. Investors generally cheer a stock that meets or exceeds those estimates, but they might sell shares to punish a company that misses its target. Good earnings can also be relative, based on market and economic conditions for corporate profits.
Earnings are a measure of a company's profits over a period of time. Companies that list shares in the public markets disclose earnings results quarterly and annually. One way EPS is evaluated is in comparison to a year-ago period. It is generally a positive development when earnings exceed performance from the year-ago period. When earnings fall below year-ago results, companies typically offer some explanation for the shortfall, and it is up to investors to decide how to treat the stock.
One of the most transparent ways to determine whether a company has good earnings is to measure results against third-party expectations. Leading up to an earnings release, financial analysts who follow that company or sector generally estimate profits. Many corporate executives also issue estimates, but they might release those figures in an attempt to sway Wall Street analysts, according to a 2012 article in USA Today. When actual results fall short of analyst estimates, it is not uncommon for a stock price to suffer.
EPS is typically considered good when a corporation's profits outperform those of similar companies in the same sector. U.S. Bancorp produced earnings and revenues that exceeded the performance of its competitors in the years following the global economic crisis of 2008. Indeed, for more than two years after the recession, the company continued to increase its earnings in nearly every quarter. As a result, credit ratings agency Standard and Poor's upgraded its rating on the bank, according to Bloomberg.
It is difficult to predict how investors will treat a stock during earnings season. Sometimes -- even when EPS is good -- investors sell shares. There are also instances when investors reward a stock even though earnings underwhelm. In August 2012, high-end retailer Tiffany lowered its earnings expectations for the entire year. Investors were relieved that the downward-revised forecast was not any worse, given regional economic weakness. The stock climbed more than 7 percent as a result, according to The Wall Street Journal.
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