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 the previous year's EPS. It is generally a positive development when earnings exceed performance from the previous year. When earnings fall below recent results, companies typically offer some explanation for the shortfall, and it is up to investors to decide how compelling the explanation actually is and therefore how to treat the stock.
Measuring Against Expectations
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 themselves. Either way, when actual results fall short of analyst or company estimates, it is not uncommon for a stock price to suffer.
Comparing to Similar Companies
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. Recently, however, the company has been placed on review for breakdowns in its compliance risk reporting.
Other Determining Factors
It is difficult to predict how investors will treat a stock during earnings season. Sometimes — even when EPS is good — investors sell shares. One reason for this is something called the "whisper number." This describes a collective consensus that investors reach based on their personal feelings about a stock's upcoming performance. Noise traders also can affect a stock's ratings. These traders base their trading activities on news and trends, rather than careful analysis of an investment.
Video of the Day
- american flag image by Brett Bouwer from Fotolia.com