Question

Earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First, earnings announcements concern past periods, If the market values stocks based on expectations of the future, why are numbers summarizing past performance relevant? Second, these announcements concern accounting earnings. Such earnings may have little to do with cash flow - so, again, why are they relevant?

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Answer 1

Earnings announcements by companies are closely followed by,and frequently result in ,share price revisions.

Earning announcments by Companies are closely followed by, and frequently result in share price sevisions. Answer: The numbers of the past are important because investors can see trends in the profitability of the Company, for instance if a comparty publishes these statements every quarter Investors may be able to see that their profits tends to dip in the 4th quarter thus they may be able to acquire more of the shares ofter the 4th quarter at a low price. It is true that the price of stock shares is genesally based on future projections, .but those future projections are almost always Gased on past trends both for the individual Company and for the industry that the firm isin. The increase in occounting earnings is geneally a result of an estimated excalation in stock poice, so the number of stocks the Company is holding of thinking about issuing will change in value. So again these statements allow current and potential investors to make decisions segarding investing in the from.