An earnings increase will usually make the stock price to rise. Most of the companies with high earning also pay dividends regularly to their shareholders. The first most important step the investors have to take is to analyze earnings. This will give an indication of the expected future dividends of the company, growth potential, and capital appreciation.

The Basics

Earnings, in simple terms, mean the profit of a company or how much money it made during a given period. Earnings are calculated by subtracting the cost of sales, operating expenses, and taxes from its sales revenues. ‘Cost of sales’ is the total amount spent on raw materials, labor, and other expenses for producing a product. ‘Operating expenses’ are expenses such as salary, legal expenses, advertisement, and taxes, etc. incurred for conducting the business.

Positive Earnings

Established companies like Infosys are expected to declare high earnings and so when lower earnings for a quarter are reported, the price of the stock goes down. New companies, for years, may record negative earnings and continue to enjoy the confidence of the market if investors believe in the company’s future.

Companies are mandated to declare their earnings figures every quarter.

The financial year in India is from the 1st of April to March 31st.

So the First quarter will be from 1st April to 30th June.

Second-quarter will be from 1st July to 30th Sept.

Third-quarter will be from the 1st Oct to 31st Dec.

Fourth-quarter will be from – 1st Jan to 31st Mar.

Earnings for the above quarters are declared in May, July, October, and January respectively. The earnings reporting day is always approached with caution as there is a possibility of volatility in the stock.

Some companies declare half-yearly results by combining two quarters. Based on the facts provided, investors have to work out the expected earnings. It is this expectation that is reflected in the movement of the stock price. We see that both the actual earnings and the expected earnings play an important part in the price of a stock. Stocks of companies that do not meet the investors’ expectations will see a fall in price. Earnings or earnings growth gives an idea about the health of the company.

Earnings per Share

EPS or “earnings per share” is the basic measurement for earnings. EPS is arrived by dividing the earnings by the total number of outstanding shares. Let us say that if a company has earned Rs 250 crores in the last quarter and has 100 crore shares outstanding then the EPS will be Rs 2.50 (250 / 100).

Why calculate EPS?

The purpose of reducing the earnings per share is to enable us to compare it with other companies. Let us take two companies ABC and XYZ. Both earned a profit of 250 crores. Outstanding shares of ABC are 100 crores and outstanding shares of XYZ are 125 crores. ABC company has an EPS of 2.50 (250/100) whereas the XYZ company has an EPS of 2.00 (250/125). Naturally, the investor will prefer ABC over XYZ because ABC gave a higher profit per share than XYZ.

It should be noted that EPS helps compare two companies with the assumption that they are competitors are under the large-cap or small-cap category and the same industry. EPS does not tell you whether it is a good stock to invest in.

Types of EPS

There are three types of Earnings numbers:

· Trailing earnings – This is the earning figure of the previous year-end.

· Current earnings – This is the number for the current year, part of which are actuals, and part of which are projections based on the current level of performance.

· Forward Earnings – This purely an estimate for future earning numbers.

Outstanding shares can be classified as either Basic or Fully diluted

Basic EPS is calculated by using the number of shares issued and held by investors and can be traded in the market. Basic Earnings per share informs the investor how much profit of the company belongs to each share. This excludes any possible dilution coming from outstanding dilutive securities. Dilutive securities include warrants, options, convertible preferred stock, or convertible bonds.