Corporate earnings are the bottom line of a business, showing how much money is left over after covering expenses like salaries, operating costs and taxes. These quarterly reports give investors a window into the financial health of public companies and are one of the biggest factors influencing stock prices, with positive results attracting investment and negative news driving selloffs.
Corporate profits are an important part of the overall economy, providing a snapshot of private sector productivity and incentivizing firms to invest in growth. Earnings data is also used by central banks to inform monetary policy, as higher earnings can lead to lower unemployment and inflation.
A common misconception is that revenue growth always equates to business success, but this is not the case. Revenue growth is one indicator of a company’s ability to sell, but profitability is determined by a combination of many factors including operating efficiency and cost control. It is possible for a company to have high revenue and still have slim profit margins if they are using discounts or heavy marketing campaigns to drive sales, for example.
A good way to assess a company’s profitability is to compare its net income (profit) with its total number of outstanding shares. This ratio is called Earnings per Share (EPS) and it shows how much of a company’s profits are distributed to each share owner. Companies with a larger number of outstanding shares will have a higher EPS than those with fewer shares.