Companies that trade shares in the public financial markets are required in most regions to report the amount of profits and revenues generated over a period of time to some regulatory authority. In the United States, it is the Securities and Exchange Commission, and in the United Kingdom, the main regulatory body is the Financial Services Authority. These financial reports are known as earnings announcements. Typically, an earnings announcement is unveiled on a quarterly basis and represents activity in the previous three months.
An earnings statement is similar to a report card for a corporation's finanical health. It reveals how healthy a company’s balance sheet or financial state is, compared with what the investment community is expecting based on other events that transpire at the company. This is important because earnings typically are a reflection of a corporations’ health, so investors are dependent on such information to determine whether buying shares of that company makes sense.
The earnings announcement date is predetermined and reported by the company, such as on its website. This time will coincide with what is known as earnings season, a period of weeks in which all publicly traded companies in that region are scheduled to make their earnings announcement. In the U.S., earnings season comes around four times per year. Often, shares in a company will trade in heavy volume in response to the earnings results. This means that many investors will either buy or sell shares based on what the earnings announcement reveals.
For instance, financial analysts will set an expectation for what the earnings results will be. A consensus estimate is established based on the average result that financial analysts devoted to that company expect. If the company meets or exceeds those estimates, the stock is likely to rise in response. If estimates are missed and earnings are worse than anticipated, however, investors often will punish that stock by selling shares and subsequently putting pressure on the value of that stock.
The information in an earnings announcement can be quite complex at times, depending on how the company displays that content. The bottom line result is another way of indicating profitability in a quarter. This is illustrated in one lump-sum number, known as net income, and as an earnings-per-share number, which is profitability based on the number of outstanding shares or investor owned stock in that company.
The other key piece of information in an earnings report is revenue, which is another way of revealing what sales growth was like in a period. This also is referred to as top-line growth and can be a key indicator of a company’s financial health. Financial analysts prepare estimates both for bottom-line and top-line growth leading up to a company’s earnings announcement.