earnings and eps
video transcript
Earnings are what drives a company forward. Without earnings and cash a business or company cannot survive. The market eats up any companies that report poor earnings and in this video I hope to tell you guys a little bit more about earnings and how much of an impact they have on a company. Earnings are publicly reported by every publicly trading company four times a year, meaning they report every three months. Earnings are generally just an updated version of the company's financials like cash flow, income statement, and balance sheet. Now, the most significant thing while reporting earnings, is attempting to beat the analysts consensus earnings expectations. For every publicly trading company, analysts come together and make target estimates of what earnings should look like for the company. If the company beats expectations, then the stock may go up, if it doesn't then the share price could very well decline. A company also can give guidance for the company moving forward, talking about whether earnings may be stronger, or weaker than expected for the next coming quarter. If during an earnings call somebody says McDonald's earned 1 billion dollars last quarter, they are referring to the net income that the company has made in the quarter. In the case of Bank of America, this figure is actually a negative, and this is because the bank had to fight off legal costs after the financial crisis during the 2008 recession. We see the precise number here is negative 276 million dollars. If you've ever watched an earnings call, you must also remember that not only with the key income numbers, we also hear the earnings per share, otherwise known as the EPS being announced, whether it is the annual or quarterly EPS. EPS is a measurement of the company's profit that many analysts use to value a stock. It is most effective when comparing it to similar stocks in the same sector. If you want to calculate the EPS, all you have to do is take the net income, subtract the preferred dividends, and divide that figure by the outstanding shares. However, the EPS data is very accessible, so you will almost never need to calculate this number yourself. The EPS for Bank of America is 71 cents over the past year, and you are probably wondering is this good or bad? Well, the higher the better, but the EPS will always depend on the company, larger companies, will probably have larger EPS numbers. However, there are a couple of flaws to the EPS. Let's say a company uses its own cash and buys back its own shares, this will mean that there are less outstanding shares, meaning an automatic boost in the EPS of the company, even though the earnings haven't been changed at all. Another flaw in the EPS is that that since we are using the earnings of a company, the EPS might not be very accurate. This is because a lot of times there are intangibles that are subtracted from the earnings, which can make the numbers easier to manipulate. In this scenario, analysts prefer a different figure known as the free cash flow per share, but that is something that will not be talked about for now. Earnings and EPS are also very useful for comparing with previous quarter's and year's production to see how much the company has improved over time.