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.