Another earnings season is upon us. It's arguably the best insight into the financial health of Corporate America, but it can also be overwhelming due to the volume of data released. For this installment of Investing 101, we take a closer look at quarterly earnings reports, explaining the key terms and numbers that matter.
The Top Line
A company's total sales or revenue results is called their "top line" figure. This is where all the calculating begins. It's the number from which various costs and expenses of running a business are deducted. Sales growth is the primary measurement for most companies and is normally computed as the percentage change from the same period a year ago.
The Bottom Line
There are two primary ways of calculating how much money, or profit, a business made. The first is net income, expressed in dollars. The second is earnings per share (or EPS). This number is calculated by dividing the profit by the number of shares outstanding.EPS is also the main number computed by analysts who make estimates ahead of earnings releases. The average of all of these is known as "the consensus estimate" and is the number a company is expected to hit. It is important to know that businesses aren't always profitable and therefore income and EPS can be positive or negative numbers.
Because of the innate complexity involved in running a large business, many companies choose to exclude certain items from the calculations in hopes of painting a better picture as to how the underlying business is actually doing.
As much as meeting Wall Street's expectations is important, an equally critical aspect of earnings season concerns what is called guidance. This is essentially a forecast of future activity. Like trailing results, it can be market moving if the new outlook differs from what analyst were already expecting.
Of course there are all sorts of different ways to assess how a business is doing and what it should be worth. Ultimately it boils down to sales and profits, how much they're growing, and how those results compare to expectations.