What is an Earnings Estimate?

An earnings estimate is the amount that a financial analyst believes a company is going to announce that it earned. Each quarter, publicly held companies announce their earnings on given dates. This means they release to the world their balance statements, including profits and losses and future projections. A financial analyst attempts to make a prediction on what the numbers on that balance sheet will look like.

A public company's earnings are very important to stock market investors' perceptions of that company. One of the most common matrix for determining whether to invest in a stock is a price per earnings comparison. Referred to as a P/E ratio, this means investors compare the price of a single share of stock to the company's earnings, and then use this number to determine whether the stock is a good deal or a bad deal when compared to the P/E ratios of related stocks within a given sector. This allows for equal comparison, because if a company earns $1,000,000 US Dollars (USD) per quarter and a share of the company costs $10 USD, this stock is obviously a much better deal than a company that earns $1,000,000 USD but that charges $1,000 USD per share.

Because of the importance of earnings as a financial marker, earnings estimates are issued by experts within the financial services industry. Brokerage houses, financial analysts and other related authorities may issue an earnings estimate suggesting they believe the earnings will be a given number. They may also release estimates that state what they expect the earnings per share or the P/E ratios to be. Because of the potential risk that a company will not meet or exceed its estimated earnings, many investors believe it is too risky to hold a stock through its earnings period.

When a stock performs differently from an earnings estimate made by the analysts, that can have a very dramatic impact on the perceived value and price of the stock. For example, if the earnings estimate suggests that the earnings per share of a given company will be $0.15 USD per share and the earnings per share of the company are actually $0.10 USD per share, then investors and the market as a whole will be disappointed, even if the $0.10 USD per share is more than the company had earned in the quarter before. If a stock beats the earnings estimate, however, the stock can rally and go up in value.