Stock prices move for many reasons, but earnings growth is one of the most important factors investors should focus on. Understanding how to properly analyze earnings reports can help you make better investment decisions and avoid getting misled by flashy headlines.
“An earnings report tells you the general economic health of a company,” Josefino Gomez, a Registered Financial Planner, told FinancialAdviser.ph “It includes how much money a company made over a specific period and helps determine whether to buy, sell, or hold a stock.”
Here’s how to properly evaluate earnings growth and what to watch out for.
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Don’t Trust the Headlines—Read the Full Earnings Report
Earnings press releases often highlight the good and downplay the bad. A headline might say “Revenue up 20%”, but if net income remains flat, it could mean the company isn’t managing costs well.
“Press releases are designed to show positive bias,” Gomez warns. “Always do your own due diligence.” Read the full earnings report or listen to earnings calls to get the complete picture.
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Focus on Earnings Per Share (EPS), Not Just Net Income
Earnings growth alone can be misleading. If a company issues more shares, its earnings per share (EPS) could decline even if net income rises.
“If net income grows 50% but share count doubles, EPS actually drops,” Gomez explains. “Always check EPS growth, not just total earnings.”
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Look for Consistent Growth, Not One-Time Gains
A company might report a big jump in profits from a one-time event, like selling an asset. But these gains aren’t sustainable.
“Focus on recurring earnings,” says Gomez. “If profits come from temporary cost-cutting instead of real sales growth, they might not last.”
Consistent revenue and earnings growth are better indicators of long-term strength. “If a company’s revenue is rising but earnings are slowing, it may be struggling to pass costs onto customers,” Gomez adds.
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Use Other Financial Statements to Verify Earnings
A company can report strong earnings but struggle financially. Always check:
The balance sheet – “A sound balance sheet with manageable debt is critical,” Gomez says. “Receivables and inventory should grow at a similar rate as sales.”
The cash flow statement – “Positive operating cash flow is a good sign of real earnings growth,” he notes. “It means the company isn’t relying on accounting tricks.”
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Compare Expectations vs. Reality
Analysts set earnings estimates, and companies sometimes provide guidance. A major difference between actual earnings and expectations can trigger upgrades or downgrades—causing stock prices to move sharply.
“A single bad earnings report isn’t always a reason to sell, but if a company consistently misses estimates, it could be a red flag,” says Gomez.
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Think Beyond the Numbers
Earnings growth is crucial, but other factors matter too. Industry trends, government regulations, and technology changes can all impact future earnings.
“A stock isn’t just about its past earnings—it’s about where the business is going,” Gomez explains. “If you only look at current numbers, you risk missing bigger shifts that affect long-term growth.”
As Peter Lynch famously said, “If you can follow only one bit of data, follow the earnings.” But don’t stop there—look at the bigger picture to make smarter investment decisions.
The Bottom Line
Earnings growth is one of the key drivers of stock prices and an essential metric for investors. But it’s not just about looking at the numbers—pay attention to the quality and consistency of that growth. By focusing on recurring earnings, using other financial statements, and factoring in broader trends, you’ll gain a better understanding of a company’s potential. Smart investors look beyond the surface and assess the long-term viability of earnings growth for better decision-making
