What is the earnings estimate?

An earnings estimate is the analysts’ expectation of a company’s future quarterly or annual profits or earnings per share (EPS).

In this article, we will learn what earnings estimate means and how it‘s calculated.

Analysts’ earnings estimates for stocks play an important role when considering which assets to trade or invest in. Markets are forward-looking and future earnings estimates are important to know when attempting to value a stock. 

How are earnings estimates calculated? Analysts use valuation models, historical data, industry outlook, macro environment analysis, management guidance and other financial information to derive an earnings estimate.

A consensus earnings estimate, which is an aggregate of earnings estimates from various analysts, is often used as a benchmark against which a company’s performance is compared.

When a company reports quarterly or annual earnings higher than analysts’ expectations, it is said to have “beaten estimates” and be “above expectations”. You will also hear of companies “missing estimates” or reporting earnings “in line with expectations”.

Financial data companies like Refinitiv and Zacks compute consensus earning estimates for various stocks. Research firms like Morningstar provide revenue, profit and EPS estimates along with stock price targets for numerous stocks.

Earnings estimate example

Let’s take Apple (AAPL) as an example. According to the Zacks consensus stock estimated earnings, Apple is expected to report sales of $82.44bn and EPS of $1.14bn for the June quarter.

These figures do not say much on a standalone basis, but when compared to the company’s reported sales and earnings for the period they show whether Apple had a strong earnings performance or not. 

Apple’s second quarter results for fiscal 2022 showed that the company reported total revenue of $97.3bn and an EPS of $1.52 a share, which beat analysts’ average estimates of $93.99bn and $1.44, suggesting a strong showing by the iPhone maker.

Analysts can also publish earnings estimate revisions in light of new developments and macro environment changes. Likewise, companies can upgrade or downward their earnings forecasts depending on their outlook. Reported earnings are often compared with analysts’ consensus earnings estimates and stated company forecasts

Understanding earnings estimate definition

To sum it up, an earnings estimate is an important gauge that helps investors analyse a company’s performance and reach investment decisions.

There have been numerous instances when a company’s share price has soared after reporting earnings above estimates. Similarly, investors tend to react negatively to news of a company missing earnings estimates.

It should be noted that investors may choose to overlook earnings estimates and give more weight to other factors such as a company’s outlook or macro environment conditions.

Also note that analysts base their estimates on the stock’s past performance, which never guarantees future results. Analysts’ predictions can be wrong. You should always conduct your own due diligence before making any trading decision. And never invest money that you cannot afford to lose.