Corporate earnings are the bottom-line figures that measure a company’s profitability and are the basis for key metrics like earnings per share (EPS) and price-to-earnings (P/E) ratios, which are vital to stock valuation. Corporate profits are also one of the biggest components of overall economic activity and therefore, are closely watched by investors and traders around the world.
In its simplest form, corporate profits represent company revenues minus company expenses. Companies then have the choice of reinvesting their profits in hopes of growing their business or distributing them to shareholders through dividends or share buybacks. Many companies choose to reinvest their profits in the hopes of growing their businesses over the long term, while more mature companies often prefer to distribute their profits to shareholders in order to receive a return on their investments.
While individual companies calculate and report their own quarterly earnings results, the Bureau of Economic Analysis (BEA) publishes aggregated data on a quarterly basis. This data is used by investors, Congress, policymakers, and business and community leaders to make decisions that impact the U.S economy. Rising company profits are associated with higher employment and production, while falling company profits signal potential layoffs and a weakening of the overall economy. While there is a significant lag between when companies file their earnings reports and when the BEA releases their data, earnings season remains one of the most important events in the markets each quarter. Companies report their earnings in order to meet regulatory requirements and disclose key metrics to shareholders. Investors and traders analyze these reports in order to gain insights into operational health, future growth potential, and pricing strategies.