Corporate earnings are a key metric used to gauge the financial health of companies and broader economic trends. Earnings are a measure of all the money that a corporation brings in during a period, minus all the expenses it incurs.
A good or bad set of results can make or break a company and its stock price. It can also attract or turn away new investors and buyers. Trading based on corporate earnings is not without risk, however, and doing thorough research and spreading out investments across multiple industries and companies can mitigate some of the risks involved.
One of the main reasons people look at corporate earnings is to see if a company is spending too much or not enough, and whether its profits are growing or falling. However, some companies are able to boost their earnings by using accounting quirks that don’t reflect long-term value creation. For example, if they use an accounting method to overstate the wear and tear on their assets, it could give them the appearance of higher profits than they deserve.
Another reason why corporate earnings are important is because they are a leading indicator of broader economic trends. For example, if a large number of companies report great results, that might signal that the economy is doing well and could influence central bank decisions on interest rates and other policies that affect the country. Likewise, if a lot of companies report weak results, that might signal that the economy is struggling and could lead to lower stock prices.