Earning Estimates & Why they are Important

Earnings estimates are an analyst’s estimate for a company’s future quarterly or annual earnings. These earnings estimates are earnings per share numbers that the analyst believes a particular company will report in its next statement . Future earnings estimates are arguably the most important input when attempting to value a firm, as companies that “beat” the estimates typically see their stock prices rise while those that do not usually watch them fall. By placing estimates on the earnings of a firm for certain periods (quarterly, annually, etc), analysts can then use cash flow analysis to approximate a fair value for a company, which in turn will give a target share price for publicly traded companies.

Analysts use forecasting models, management guidance and fundamental information on the company in order to derive an estimate. Market participants rely heavily on earnings estimates to gauge a company’s performance when announcing quarterly or annual results. The analysts’ earnings estimates are used as a benchmark to measure a firm’s performance relative to how experts expected it would do.

One should ensure earnings information comes from unbiased sources, such as the so-called “earnings whispers” or “whisper numbers”. Earnings whispers are intended to help investors avoid being duped by misleading estimates. They are created using a variety of methods (such as polling individual investors or enlisting the help of independent, unbiased analysts), and are often more accurate than Wall Street’s estimates.

A number of websites report estimates on their quote screens. Most collect a number of estimates and average them for a consensus estimate in one form or another. One of the more comprehensive sites is Reuters.com, which has several estimates including earnings and revenues. Enter a stock symbol for a quote, and then click on the “Estimates” link in the left hand column.