Corporate earnings—the profits that public companies make minus their costs—are at the heart of market pricing and a key indicator of economic trends. They’re critical for informed investing decisions and help investors evaluate a company’s performance and growth potential. They’re also used by traders to gauge the health of a sector or economy, and by central banks in setting interest rate policies.
During earnings season, market participants focus on metrics like EPS and net income to get a clear picture of a company’s profitability and cost structure, and to assess its long-term growth potential. Investors and traders may also focus on industry-specific metrics, such as research and development (R&D) spending or subscriber growth for companies that offer subscription-based services, or production volumes and commodity price trends for energy firms.
Earnings reports provide a snapshot of a company’s financial health and a glimpse into its management team’s ability to grow revenue and profit margins in the face of challenges and changing business conditions. Management teams will often provide commentary on a company’s earnings call—typically held after the formal release of the report—to provide context and amplify or dampen the narrative around important metrics like revenue growth, profit margins, and EPS.
Several different terms are used to describe the bottom line of a company’s operations, including net profit and EPS, but one of the most commonly cited is EBIT—earnings before interest and taxes. This metric is often used by analysts and investors to compare the profitability of different companies, as it excludes non-operating expenses like interest and debt payments.