What Is an Earnings Announcement?
An earnings announcement is an official public statement of a company's profitability for a specific period, typically a quarter or a year. An earnings announcement occurs on a specific date during earnings season and is preceded by earnings estimates issued by equity analysts. 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. Because earnings announcements can have such a prominent effect on the market, they are often considered when predicting the next day's open.
Key Takeaways:
- An earnings announcement is an official public statement of a company's profitability, usually issued on a quarterly basis.
- Earnings accouncements have an effect on the share price, which will move up or down depending on the company's performance.
- Analysts estimate how the company will perform, but these expectations can rapidly adjust up or down in the days leading up to the announcement.
Understanding Earnings Announcements
The data in the announcements must be accurate, according to Securities and Exchange Commission regulations. 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 and affecting speculative trading.
Earnings Announcements and Analyst Estimates
For analysts valuing a firm's future earnings per share (EPS), estimates are arguably the most important input. Analysts use forecasting models, management guidance, and other fundamental information on a 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 analysis (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 outlines the reasons behind certain aspects of growth or decline in the company’s income statement, balance sheet, and statement of cash flows. The MD&A discusses growth drivers, risks, and even pending litigation. Management also often uses this section to discuss 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 macroeconomic climate, pending U.S Federal Reserve meetings and potential interest rate hikes.
FAQs
An earnings announcement is an official public statement of a company's profitability for a specific period, typically a quarter or a year. An earnings announcement occurs on a specific date during earnings season and is preceded by earnings estimates issued by equity analysts.
Should I buy stock before or after earnings report? ›
If you believe a company will post strong earnings and expect the stock to rise after the announcement, you could purchase the stock beforehand. Conversely, if you believe a company will post disappointing earnings and expect the stock to decline after the announcement, you could short the stock.
Do stocks go up after earnings reports? ›
News related to a specific company, such as the release of a company's earnings report, can also influence the price of a stock (particularly if the company is posting after a bad quarter). In general, strong earnings generally result in the stock price moving up (and vice versa).
Why do companies announce earnings after the market closes? ›
In today's markets, it comes down more to the general timing of a release rather than a specific day of the week. A company might plan to announce their earnings after hours when there is typically a lower level of investor attention being paid.
What are the 4 terms commonly used in earnings announcements? ›
Revenue: How much money a business earns during the recorded period. Costs of goods sold (COGS): The cost behind what it takes to make the units sold. Gross profit: Total revenue minus COGS. Expenses: How much money the company spent during the recorded period.
How do earnings announcements affect stock prices? ›
Beaver (1968) establishes that stock price volatility and trading volume increase significantly during the earnings announcement period. Both stock price volatility and trading volume reflect the impact of earnings announcements.
Why do stocks go down when earnings are good? ›
When a company releases an earnings report, a fundamental reaction is often the most common. As such, good earnings that miss expectations can result in a downgrade of value. If a firm issues an earnings report that does not meet Street expectations, the stock's price will usually drop.
How to profit from earnings reports? ›
If a company exceeds expectations and reports strong earnings, its stock price is likely to rise, and traders may want to consider buying shares. Conversely, if a company reports weaker-than-expected earnings, its stock price may fall, and traders may want to consider selling their shares or shorting the stock.
How do you predict stock price after earnings? ›
A straddle is an options strategy that uses at-the-money (ATM) call and put options with the same expiration. The price of a straddle can be used to measure the market's expected stock price move after earnings announcements.
Why announce earnings before the market opens? ›
That's because companies reporting early in earnings season get additional media attention, a boost to volumes and, more importantly, a 50bps higher earnings announcement premium!
In general, each earnings season begins one or two weeks after the last month of each quarter (December, March, June, and September). Thus, look for the majority of public companies to release their earnings in early to mid-January, April, July, and October.
Should you hold a stock through earnings? ›
The golden rule
You must never hold a stock through earnings if you don't have enough cushion to protect against the potential downside. This is a key part of our risk management strategy and we've seen it work over the years.
When must a company announce earnings? ›
In general, each earnings season begins one or two weeks after the last month of each quarter (December, March, June, and September). Thus, look for the majority of public companies to release their earnings in early to mid-January, April, July, and October.
What is the purpose of an earnings release? ›
Earnings calls and earnings releases play important roles in investor relations and corporate transparency. Both serve as windows into a company's financial health, performance, and strategic direction, offering stakeholders vital insights.
How do you read an earnings announcement? ›
The most important parts of an earnings report are the income statement, balance sheet, cash flow statement, and statement of shareholder equity. The press release and presentation deck portions of an earnings report can hold marketing bias, so do your due diligence and read the numbers.
Why do companies pre announce earnings? ›
By issuing an early announcement in a press release, companies advise investors and analysts of potential surprises ahead of time. This enhances goodwill with the investment community and may protect the stock against wider swings after an earnings estimate miss.
