Earnings Reports and Their Importance
Every quarter companies issue a report on the earnings they have generated. The failure to meet the expectations of the market analysts may result in a fall of the stock price of the company.
On the other hand, even when a company has met the expectations of market analysts, a fall in its stock price has been observed.
An example of a company that managed to meet analysts' expectations regarding earnings, but still suffered decline in its stock price is Amazon.com. The problem with Amazon.com was that its fourth quarter sales and net income fail to meet the expectations of the market. Earnings were not enough to compensate for this lagging behind.
As a result of the short earnings and revenue was the decrease in the price of the company's stock. The market disregarded the fact that Amazon.com was still making money to its shareholders.
Other companies that failed to meet the expectations of the market are Google, Yahoo and eBay.
Being classified as growth stocks, they are supposed to show growth. And being unable to meet these expectations the market is ruthless and hammers their stock.
Doing everything the way it seemed to be done, Google still suffered one of its first bad quarters.
What is important to remember is that the market hammers the stocks of companies that fail to meet its expectations, whereas rewards those companies that succeed in achieving the expecting results or even outperform them.
What matters for market analysts is earnings. Even though they are not the only component of success, they are extremely important for analysts when deciding on whether to punish or reward the company's stock.
Earnings are estimated by subtracting the expenses of the company from its revenue. Other factors are included in the estimations, but generally these are the most important ones.
A change in revenues and expenses results in a change in earnings, following the logic of how earnings are estimated. Even a change in only one of the components (revenues or expenses) results in a change in earnings.
If a company falls short of the expectations of market analysts, the problem should be searched in either an increase in the expenses the company has generated, or a fall in the revenue.
Finally, the earnings season is the time when companies issue reports on their earnings. Thus, this is the time when you should study these reports, since you will be able to see whether the price of the company's stock will be changed and in what way.
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