What is 'Earnings Announcement'

An earnings announcement is an official public statement of a company's profitability for a specific time period, typically a quarter or a year. An earnings announcement typically occurs on a specific date during earnings season and is preceded by earnings estimates that equity analysts issue. If a company has been profitable leading up to the announcement, its share price will usually increase up to and slightly after the information is released.

BREAKING DOWN 'Earnings Announcement'

Because the earnings announcement is the official statement of a company's profitability, the days leading up to the announcement are often filled with speculation among investors. Analyst estimates can be notoriously off-the-mark and can rapidly adjust up or down in the days leading up to the announcement, artificially inflating the share price alongside speculative trading.

Earnings Announcement and Analyst Estimates

For analysts valuing a firm future earnings per share (EPS) estimates are arguably the most important input. Analysts use forecasting models, management guidance and other fundamental information on the company to derive an EPS estimate. For example, they might use a discounted cash flows model or DCF.

DCF analyses use future free cash flow projections and discount them. This is done using a required annual rate to arrive at present value estimates, which in turn is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity could be a good one.

Calculated as:

DCF = [CF1/(1+r)1] + [CF2/(1+r)2] + ... + [CFn/(1+r)n]

CF = Cash Flow

r= discount rate (WACC)

Analysts may also rely on fundamental factors outlined in the management discussion and anaylsis (MD&A) section of a company’s financial reports. This section provides an overview of the previous year or quarter’s operations and how the company performed financially. It digs into the reasons behind certain aspects of growth or decline on the company’s income statement, balance sheet, and statement of cash flows. It discusses growth drivers, risks, even pending litigation. Management also often uses this section to discusses the upcoming year by outlining future goals and approaches to new projects, along with any changes in the executive suite and/or key hires.

Finally, analysts may take into account external factors, such as industry trends (e.g. large mergers, acquisitions, bankruptcies, etc.), the macro economic climate, pending U.S Federal Reserve meetings and potential interest rate hikes.

RELATED TERMS
  1. Discounted Cash Flow (DCF)

    Discounted cash flow (DCF) is a valuation method used to estimate ...
  2. Absolute Value

    Absolute value is a business valuation method that uses discounted ...
  3. Earnings Call

    Earnings call is a conference call between a public company, ...
  4. Cash Flow From Investing Activities

    Cash flow from investing activities reports the total change ...
  5. Coverage Initiated

    Coverage initiated is when a brokerage or analyst issues his ...
  6. Comparative Statement

    A comparative statement is a document that compares a particular ...
Related Articles
  1. Investing

    DCF Valuation: The Stock Market Sanity Check

    Calculate whether the market is paying too much for a particular stock.
  2. Personal Finance

    Discounted cash flows or comparables: Which to use

    DCF and comparables models are widely used in equity valuation, and here we'll explain the pros and cons of each method.
  3. Investing

    Fundamental Investment Metrics For Buying Stocks And Bonds

    Don't let the name fool you. Even a "fundamental" investor has to pay attention to certain metrics.
  4. Investing

    Equity Valuation In Good Times And Bad

    Learn how to filter out the noise of the market place in order to find a solid way of determing a company's value.
  5. Insights

    Earnings Forecasts: A Primer

    Learn how this key metric is calculated and how it is used to judge market performance.
RELATED FAQS
  1. What industries tend to use discounted cash flow (DCF), and why?

    Understand the valuation method of discounted cash flow analysis and why it is more suitable for evaluating certain industries ... Read Answer >>
  2. How does the dividend discount method (DDM) work?

    Learn about the dividend discount model and when it can most appropriately be used to measure the value of a stock by fundamental ... Read Answer >>
  3. What is the difference between a cash flow statement and an income statement?

    Learn how a cash flow statement measures the sources and uses of a company's cash, while an income statement measures a company's ... Read Answer >>
  4. How are cash purchases recorded on a company's income statement?

    Take a deeper look at the treatment of cash payments on a company's financial statements, including how specific purchases ... Read Answer >>
Trading Center