What Does it Mean When a Company "Beats" or “Misses" Earnings?

Q: What is an earnings beat/miss?

A: Four times a year, business news is full of stories about companies that have "beat" or "missed" earnings expectations. What exactly do they beat or miss? And who sets these expectations? Let's dig in.

In North America, securities regulations require that all publicly traded companies release their financial statements four times a year. These reports include quarterly earnings — how much a company has earned during a three-month period — which can be calculated in different ways but is often presented as earnings per share, or EPS.

So, company earns, company reports. Makes sense. But how is the earnings report reflected in the stock price? From an investor's perspective, is it possible to know if the earnings report is good news or bad? Enter the research analysts.

Great Expectations

Stock analysts study individual companies and how they perform. They develop an opinion on what a company's earnings will look like each quarter using available data, including previous financial statements, guidance from the company's management team, industry data, economic trends and other information.

The quarterly earnings expectations from all the analysts that cover a company are averaged out to find the consensus analyst estimate. The number of analysts covering a particular company is largely dependent on the size of the company and the trading volume of its stock. Large, well-known companies tend to be covered by many analysts and the consensus is therefore derived from many opinions. A small, lesser-known company may be covered by only one or a few research analysts, and sometimes none at all.

Miss or Beat

Stock prices can move up and down after a company reports its quarterly earnings. The movement is generally related to how the report compares to the analysts' expectations rather than whether a company made or lost money. Let's say Company XYZ reports Q1 earnings of $5.25 per share, but research analysts were expecting $5.40 per share. This would be considered an earnings miss since it's less than what analysts expected, which could cause the stock price to fall. However, if the company reports earnings of $5.50 per share it would be considered an earnings beat, which could cause the stock price to rise.

Keep in Mind

It's important to note that stock price fluctuations can be based on a variety of factors, many of which go beyond earnings reports. An earnings beat doesn't always mean shares will rise, just as a miss doesn't always mean shares will fall. Other information released alongside earnings could result in a stock moving in a direction that wasn't expected.

However, reviewing how a company fares in relation to analyst expectations can be a good place to start understanding how the research analysts view the company and how markets react to earnings beats or misses. You'll find analyst expectations (the consensus estimate) under the research tab of a detailed stock quote and often in earnings calendars published by stock exchanges, news organizations and many investing-related websites.

Generally speaking, earnings misses generally cause greater fluctuations than earnings beats, and larger-scale surprises tend to have the most impact. There is no formula for predicting market reactions, so it's impossible to know how much a big miss or a solid beat will affect a company's stock price. But watching trends can be a valuable tool in your research toolbox as you seek to better understand the companies you invest in.