---
title: "Earnings Matter Most"
description: ""
canonical_url: https://trendshare.org/how-to-invest/earnings-matter-most
markdown_url: https://trendshare.org/ai/earnings-matter-most.md
published: 2011-11-07
last_updated: 2017-05-31
content_license: https://trendshare.org/about/disclaimer
---
# Earnings Matter Most

Source: https://trendshare.org/how-to-invest/earnings-matter-most
Updated: 2017-05-31
You could spend your life studying ever more exotic financial information to
try to find an edge on the right stock. Many people do. While no single number
tells the whole story of what a company can do or how well it does it, long
term [value investing](https://trendshare.org/how-to-invest/what-is-value-investing) success depends on
one very simple measurement.

## What is the Value of a Company?

What does the company *earn*?

For a business to last, it must make money. It needs to make more than it
spends, and it needs to make enough that its owners want to continue owning it.
A business that continues to make money is a business worth owning.

The value of a company represents its current assets as well as its expected
earnings. We're looking for companies with bright futures. We're looking for
companies which will earn money. You can see this potential reflected in
several important statistics.

## What is Earnings Per Share?

Earnings per Share is a financial measurement which divides the total annual
earnings (profit) of a company by the total number of shares. This represents
the profit available to each shareholder. You might see this referred to as
EPS.

Why does earnings per share matter? If you're investing in stocks which you
expect to increase in value over time (not just because you hope other people
will buy them), you're going to be very interested in [free cash generated from real earnings](https://trendshare.org/how-to-invest/what-is-free-cash-flow). After
all, you're paying for a piece of future value.

## What Does the P/E Ratio Indicate?

Earnings is one facet of things; the price of the stock is another.

The [Price to Earnings ratio](https://trendshare.org/how-to-invest/what-is-the-pe-ratio) (PE or P/E)
divides the current share price by the earnings per share. This tells you how
the market views the company. You can compare PE ratios between similar
companies, between a company and its industry (restaurant franchise, luxury
cars, home improvement stores), and between a company and its market sector
(consumer goods, manufacturing).

In general, the P/E ratio tells you what price people are willing to pay
*right now* for every dollar of earnings the produced has produced in
the most recent earnings time period. This is a good tool to measure investor
sentiment and can help you find discounted stocks.

## What Other Earnings Measurements Matter?

While earnings, free cash flow, [cash yield](https://trendshare.org/how-to-invest/what-is-cash-yield),
and the P/E ratio are top financial indicators, there are several other (not
quite as) useful ones. For example, projected earnings per share is a
prediction of what the company *will* earn.  This is an
estimate—often an average of several predictions—but it can give
you an idea about how other people see the company's prospects in the
future.

Some investors track the PEG ratio. The Price to Earnings Growth ratio is
the current PE ratio divided by the projected earnings per share. If the result
is less than 1, the stock is a bargain in terms of its projected earnings. This
of course relies on the accuracy of the projected earnings per share.

## Understanding Earnings is Essential to Successful Investing

Even though some of these measurements seem arbitrary and the daily
fluctuations of the market seem unpredictable, good companies prosper and poor
companies go out of business. Simply put: a good company earns good returns
every year.

Keep that principle in mind and you can avoid wasting time on stocks which
promise the world and fail to deliver anything. Without reliable earnings, an
investment is rarely worth your time.