For investors, corporate earnings are one of the most important indicators of market and economic health. These reports connect market valuations to actual results and influence investor expectations, which in turn affect the direction of stocks and other assets. While many understand the basics of these quarterly reports, not everyone is clear on how earnings are calculated and what they actually mean for investors.
While revenue is an important metric, it’s net profit that really matters to investors. This is the amount of money that a company has left over after all expenses and taxes have been paid. It’s also the most commonly used metric when comparing company performance over time.
The good news is that earnings have been rising faster than expected this year. But the big question is whether this acceleration in earnings will continue into the future given concerns about global growth, tariffs and higher labor costs.
A company’s ability to manage expenses and maintain margins is what ultimately drives earnings. When companies increase sales and cut costs, they can bolster profits and margins even in tough economic times. For example, during the pandemic, Amazon boosted hiring and inventory to meet consumer demand while cutting costs by reducing shipping rates.
The other way that a company can impact earnings is by buying back its own stock or distributing dividends to shareholders. By doing this, it frees up cash that can then be invested in further growth. For instance, a company can use its free cash flow to invest in new technology or research and development.