Earnings Momentum
Remember your statistics classes, where you learned about second derivative figures? Okay...how about physics, where you learned about the difference between the speed of something and the acceleration of something?
No? Yeesh. Guess we'll start from scratch...
Every quarter, a company reports how it performed over the previous three months. This is called its earnings announcement. These figures include the company's profit (assuming it didn't lose money during the quarter), as well as figures like revenue, gross margins, etc. The profit total is also known as the company's earnings.
Whether or not a company is doing well largely depends on whether its earnings are growing. That is, the firm's profit should be higher now than it was in the past. Usually, this comparison is made with the same time last year...so Funny Cat Video Production Corp. should have a larger earnings figure in 2018 than it did in 2017. That's earnings growth...something investors want to see.
However, sometimes investors are also interested in the rate of growth. When applied to earnings, this is commonly referred to as "earnings momentum."
So from 2016 to 2017, Funny Cat Corp. saw its earnings grow 25%. But from 2017 to 2018, this growth only reached 18%. What's going on? Why is Funny Cat losing earnings momentum? Do they need a new CEO? Do they need to acquire Hilarious Puppy Multimedia to extend their brand? That's the kind of thought process that happens on Wall Street.
Of course, the earnings momentum can go the other direction. If Funny Cat posts 2016 growth of 12%, 2017 growth of 21%, and 2018 growth of 35%, analysts might start gushing about its accelerating earnings momentum, and money will start piling into the stock, possibly risking a Funny Cat bubble.
Related or Semi-related Video
Finance: What are Financial Projections?96 Views
Finance allah shmoop what Our financial projections Well they're guesses
okay educated guesses we presume data is assembled reviewed and
then a crystal ball is gazed into And while projections
are made in the case of mature companies with long
cycle businesses the projections are often extremely educated and accurate
Yeah think about boeing's projected jet engine sales Well the
company takes three to four years just to set up
a fabrication run of a new style of engine and
they're working with rolls royce to do it Rolls royce
makes jet engines along with cars Their orders come in
and while they were partly paid for already and the
company knows it will produce somewhere between two hundred two
hundred fifty engines next year two hundred fifty two three
hundred engines following here and three hundred three hundred fifty
engines the year after that And yes there is some
variability and revenues But if the company produces fewer engines
well they'll have fewer costs as well So the range
they predict for profitability is pretty narrow That is they'll
have operating profit somewhere between eighty and ninety million bucks
each year Going up a little bit the next few
years That's The financial projection anyway can a bomb go
off in the factory or rather someone is smoking around
the fuel depot and then you know glam Yep that
can happen Is it likely No but it can And
it would really throw off the projections Right So projection
Is just a projection it's not a guarantee it's a
guess with other companies while like much younger ones projections
are well way more of a guess At the other
end of the rainbow from the boeing rolls royce jet
engine thing there's a brand new company just called rolls
it's an e bike company with assisted pedaling so that
riders feel like they're somewhere between superman and lance armstrong
You know the steroid guy company has had early success
having sold two thousand bike models off their website for
two grand each they're about to raise twenty million dollars
in venture capital funding Tio go big so now the
projections get really vague Will the company sell a million
bikes in three years Well that's what the founders think
but they're enthused and young for the company only sell
ten thousand bikes in three years Sure if they meet
the former projection they're billionaires If they meet the ladder
they're bankrupt Either way they can project with certainty that
their outcome begins with a b generally speaking the more
mature the industry and product the narrower or more accurate
the financial projection with startups who have no history Well
one never knows if they're projecting growth in the future 00:02:43.065 --> [endTime] like google or shmoop Come on
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