Earnings Momentum

  

Remember your statistics classes, where you learned about second derivative figures? Okay...how about physics, where you learned about the difference between the speed of something and the acceleration of something?

No? Yeesh. Guess we'll start from scratch...

Every quarter, a company reports how it performed over the previous three months. This is called its earnings announcement. These figures include the company's profit (assuming it didn't lose money during the quarter), as well as figures like revenue, gross margins, etc. The profit total is also known as the company's earnings.

Whether or not a company is doing well largely depends on whether its earnings are growing. That is, the firm's profit should be higher now than it was in the past. Usually, this comparison is made with the same time last year...so Funny Cat Video Production Corp. should have a larger earnings figure in 2018 than it did in 2017. That's earnings growth...something investors want to see.

However, sometimes investors are also interested in the rate of growth. When applied to earnings, this is commonly referred to as "earnings momentum."

So from 2016 to 2017, Funny Cat Corp. saw its earnings grow 25%. But from 2017 to 2018, this growth only reached 18%. What's going on? Why is Funny Cat losing earnings momentum? Do they need a new CEO? Do they need to acquire Hilarious Puppy Multimedia to extend their brand? That's the kind of thought process that happens on Wall Street.

Of course, the earnings momentum can go the other direction. If Funny Cat posts 2016 growth of 12%, 2017 growth of 21%, and 2018 growth of 35%, analysts might start gushing about its accelerating earnings momentum, and money will start piling into the stock, possibly risking a Funny Cat bubble.

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Finance: What are Financial Projections?96 Views

00:00

Finance allah shmoop what Our financial projections Well they're guesses

00:07

okay educated guesses we presume data is assembled reviewed and

00:12

then a crystal ball is gazed into And while projections

00:15

are made in the case of mature companies with long

00:19

cycle businesses the projections are often extremely educated and accurate

00:27

Yeah think about boeing's projected jet engine sales Well the

00:32

company takes three to four years just to set up

00:34

a fabrication run of a new style of engine and

00:38

they're working with rolls royce to do it Rolls royce

00:40

makes jet engines along with cars Their orders come in

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and while they were partly paid for already and the

00:46

company knows it will produce somewhere between two hundred two

00:49

hundred fifty engines next year two hundred fifty two three

00:53

hundred engines following here and three hundred three hundred fifty

00:56

engines the year after that And yes there is some

00:58

variability and revenues But if the company produces fewer engines

01:02

well they'll have fewer costs as well So the range

01:05

they predict for profitability is pretty narrow That is they'll

01:09

have operating profit somewhere between eighty and ninety million bucks

01:14

each year Going up a little bit the next few

01:17

years That's The financial projection anyway can a bomb go

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off in the factory or rather someone is smoking around

01:23

the fuel depot and then you know glam Yep that

01:26

can happen Is it likely No but it can And

01:29

it would really throw off the projections Right So projection

01:32

Is just a projection it's not a guarantee it's a

01:34

guess with other companies while like much younger ones projections

01:38

are well way more of a guess At the other

01:41

end of the rainbow from the boeing rolls royce jet

01:44

engine thing there's a brand new company just called rolls

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it's an e bike company with assisted pedaling so that

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riders feel like they're somewhere between superman and lance armstrong

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You know the steroid guy company has had early success

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having sold two thousand bike models off their website for

02:03

two grand each they're about to raise twenty million dollars

02:06

in venture capital funding Tio go big so now the

02:09

projections get really vague Will the company sell a million

02:12

bikes in three years Well that's what the founders think

02:15

but they're enthused and young for the company only sell

02:18

ten thousand bikes in three years Sure if they meet

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the former projection they're billionaires If they meet the ladder

02:25

they're bankrupt Either way they can project with certainty that

02:29

their outcome begins with a b generally speaking the more

02:32

mature the industry and product the narrower or more accurate

02:36

the financial projection with startups who have no history Well

02:40

one never knows if they're projecting growth in the future 00:02:43.065 --> [endTime] like google or shmoop Come on

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