A GUIDE TO CORPORATE EARNINGS

PRACTICAL PORTFOLIO

- ADAM SHELL

THE quarterly corporate earnings reporting ritual, when profit “beats” and “misses” move stock prices, is akin to a Wall Street confessional in which chief executives and chief financial officers reveal to investors how much money they made—or lost. But deciphering earnings reports is tricky because companies report their numbers in a variety of ways. You'll see GAAP earnings—and non-GAAP earnings. Operating profits. Pro-forma earnings. Diluted earnings. EBITDA. This jargon soup can make a novice investor’s head spin.

What do these different earnings measures mean? And which ones deserve your attention as you evaluate a company’s earnings power? Before diving in, it’s important to identify why profits matter. Owning stock gives you a share of ownership in a company and a claim on its profits. “Stocks and markets follow earnings and earnings estimate revisions,” says Katherine Shaw, a portfolio manager at Fidelity Investments. “At its core, a stock’s price reflects what the market believes a company is worth.” The math is simple: Earnings per share multiplied by price-earnings multiple equals the stock price.

It’s hard to value a stock and know what its prospects are if you don’t have a good handle on what it earns now and will earn in the future. No doubt, Wall Street and Main Street will be closely scrutinizing earnings and CEO projections in 2025 amid rising recession fears and uncertainty about the impact of President Trump's tariffs and other economic policies. Here’s a guide to the ABCs of corporate profit reporting.