You might have heard in the news that Disney’s EPS (earnings per share) beat estimates or is forecasted to earn over $1.10 per share next year. But why earnings? Why such a big emphasis on this?
News headlines every day draw audiences to tune in for these results. Millions of investors draw conclusions from this, but why?
What are the earnings? Many results will be money derived from labor, income from an investment, amount of money earned after all costs and expenses are paid.
Let’s simplify this with the following example:
Every year, when you file your income statement, you have a wage showing before and after taxes. Can someone reading your tax return be able to determine how much you are worth? These are your earnings, and they say nothing about your debts or how you pay them (inventory).
Companies operate the same way. They pay bills, too. If they don’t pay them, like us, they start accumulating debt, which can ultimately lead them to bankruptcy.
There are many other factors needed in order to make an investment decision.
Now you know, the next time you hear a news channel mentioning the earnings of public companies that this number by itself is meaningless without a proper background of what the company does with its debts and cash.