Question

Accounting Discussion:

Discussion: Why meet earnings benchmarks?

Watch the video Apple Jumps on Earnings (Links to an external site.). What factor is addressed that makes companies concerned about meeting (or beating) earnings benchmarks? Can you think of other factors?

You can listen to Apple's full Q4 earnings call here. (Links to an external site.)

Answer 1

Companies strive to meet earnings benchmark to ensure that price of their stock/share is maintained and even increases. Not meeting earnings benchmark will lead to decline in the stock price as the markets tend to hammer down on stocks of companies that fails to meet earnings benchmark. Meeting benchmarks is important for shareholders and the broader market as it conveys future growth prospects to investors.

In ‘Apple jumps on earnings’ the factor that is addressed that makes companies concerned about meeting (or beating) earnings benchmarks is ‘drivers of the company’s performance’. Earnings benchmark is sort of a metric against which performance of a company is systematically evaluated on a quarter on quarter basis and on a year on year basis. It serves as an indicator of growth outlook for the company, in this case Apple.

As we can see here that Apple’s stock jumped 8.47% to $217.25 after its earnings call. This was because there was quarter on quarter improvement in the topline of its i-phone franchise, service segment of Apple was sequentially up and since services are a high margin segment this piece of information told investors that good things lie in store for Apple and its stock in future. Its video streaming service will be focus in future and the company will be looking to bolster this service offering and increase the number of subscribers.