Corporate earnings are, quite simply, the amount of money that a company makes minus its costs. The details get a bit more complicated, but earnings are what connect market valuations to actual results, influencing how investors and the public judge a company’s value and potential. For this reason, they’re a crucial piece of information for anyone who invests in publicly traded companies or cares about the health of the economy as a whole.
The Bureau of Economic Analysis (BEA) reports on aggregate corporate profits each quarter. This data is important to markets, Congress, policymakers, and businesses as they make decisions that affect the entire economy. In addition, private profit data helps to incentivize businesses and consumers to continue producing and spending, driving the economy forward. Companies can choose to reinvest their profits, or pass them on to shareholders in the form of dividends and share buybacks.
Earnings per share (EPS) is a common measure of company profitability, reported as part of quarterly and annual financial statements. EPS is calculated by subtracting preferred dividends from total income, and then dividing the result by the number of shares outstanding. Rising EPS over time typically signals that a company is growing its net income without significantly increasing the number of shares in circulation, or having to dilute existing shareholders. It’s also a key input into valuation metrics such as price-to-earnings ratios. Falling EPS, on the other hand, may signal that a company is struggling and might be laying off employees.