A Primer on Earnings Reports

Corporate earnings are the Wall Street equivalent of report cards. And for investors, it's a smart idea to pore over the earnings report as assiduously as a strict parent examines junior's grades.

Take a company's revenue (the money collected from selling a service or a product), subtract the company's costs to make and distribute the item as well as expense items such as debt interest and taxes, and you get earnings (a.k.a. profit, net income and bottom line). Publicly traded companies in the U.S. are required to post earnings -- or, more precisely, financial statements, since some companies post losses instead of earnings -- every quarter. Most companies adhere to the calendar quarter, but some issue earnings based on their own fiscal calendars. (In addition to earnings, companies provide earnings per share by dividing earnings by a company's total shares outstanding.)

Because earnings are the best indication of a company's fiscal health, they are closely monitored on Wall Street. Before earnings are released, analysts issue earnings estimates for the companies they follow, and these estimates are compiled by earnings trackers such as First Call/Thomson Financial to determine a company's consensus earnings estimate. An earnings surprise occurs when a company's profit exceeds or falls short of estimates. Often, upside and downside surprises have a big impact on a company stock price. Earnings reports break out revenue and other measures of financial performance, and may also provide information about future prospects, which may move a stock.

Wall Street watches earnings to gauge a company's growth (or decline), and also uses earnings to determine a company's stock market valuation. Investors need to watch earnings as well because, as the business mantra goes, "Stock prices follow earnings."

Earnings Power

Since earnings are a vitally important factor in deciding whether to invest in a company, TheStreet.com keeps a watchful eye on earnings. Here are some choice articles that offer the skinny on earnings:

Cramer's Earnings Primer

Twelve Steps to Reading Financial Statements

Herb Greenberg's A Dozen Things You Need to Know to Watch Your Flank

Using Cash Flow Statement to Assess Corporate Risk

>To order reprints of this article, click here: Reprints