What Is an Earnings Estimate?

Earnings Estimate Explained in Less Than 4 Minutes

A man in a home office reviews documents.
•••

Twilight Show / Getty Images

An earnings estimate is a projection of a company's future earnings for a set time period. Financial analysts use various models to estimate the level of earnings a company is likely to report on a quarterly, semiannually, or yearly basis. 

If you hold stocks in your portfolio, it's important to understand how an earnings estimate could affect their value. Learn how earnings estimates can be used to determine what a company is worth, which in turn can influence that company's stock price. 

Definition and Example of Earnings Estimate

An earnings estimate is a projection about the level of earnings a company will report on a quarterly, semiannual or annual basis. Wall Street analysts use financial modeling to predict a company's future earnings, or earnings per share (EPS)

Earnings per share represent the portion of company profits allocated to each outstanding share of stock. To calculate earnings per share, you'd divide a company's net income (either reported or estimated) for a set time period by the number of outstanding shares for that time period.

Stock analysts can issue earnings estimates prior to the start of each new earnings season. Earnings season represents the time periods each year when companies release their quarterly earnings reports. Analysts then compare actual earnings with earnings estimates to determine whether the company was able to meet or beat estimates, or whether it missed the mark. 

For example, 82% of companies that had released their third-quarter earnings reports as of Oct. 29, 2021, reported an EPS above earnings estimates, according to FactSet data. On an aggregate basis, those companies reported earnings that were 10.3% above earnings estimates.

How an Earnings Estimate Works

Financial analysts use modeling to develop earnings estimates for individual companies. Again, they're specifically trying to determine a company's Earnings Per Share (EPS). The formula for EPS is as follows:

EPS = Total Earnings / Total Outstanding Shares

Once analysts calculate EPS, they can then use this figure to make a cash flow estimate for a company. This can be used to calculate the company's approximate value. Financial databases can report earnings estimates from individual analysts. But they can also use consensus estimates. A consensus estimate or consensus forecast represents an average or median of earnings estimates from individual analysts.

Earnings season typically takes place in early to mid-January, April, July, and October each year and generally lasts several weeks. 

Once earnings season begins and earnings reports are released, investors and analysts will look at whether a company beat its earnings estimate, reported earnings in line with the estimate, or fell short of expected earnings. This comparison is typically made against consensus estimates, rather than individual estimates. 

For example, the earnings estimate for Microsoft (MSFT) for the first quarter ended Sept. 30, 2021, was $2.06, according to Zacks Investment Research. The company reported diluted earnings per share of $2.27, beating analyst estimates by 10.2%.

Bloomberg and FactSet are among the top providers of consensus earnings estimate information. Consensus estimates may differ from firm to firm. 

What It Means for Individual Investors

Earnings estimates are important for investors to consider as they can influence stock pricing. 

When there's a wide gap between a company's reporting earnings and the earnings estimate, this is referred to as an earnings surprise. An earnings surprise can be positive, meaning the company beat its earnings estimate by a wide margin. Or a surprise can be negative, meaning the company did not perform as well as expected. 

When a company posts an earnings report that exceeds expectations, that can help to drive its shares prices higher. On the other hand, a negative surprise for earnings could cast doubt on a company's long-term potential for growth and the company's price could drop.

Companies can contribute to earnings estimate expectations by providing their own forward guidance. 

Along with earnings estimates, consider other fundamentals of a company, such as price-to-earnings ratio (P/E), price-to-book ratio, and debt-to-equity ratio when evaluating a company's financial health. 

Key Takeaways

  • An earnings estimate is a projection of the expected earnings per share a company is likely to report quarterly, semiannually, or annually.
  • Individual stock analysts can compile earnings estimates, which are then used to create a consensus earnings estimate.
  • A company can beat, meet or miss the mark with an earnings estimate when its actual earnings are reported.
  • Earnings estimates can be useful to investors deciding which stocks to buy or sell.