There are two major things that most people look at when picking a stock, past performance and estimated earnings.  Sadly, past performance is a key human indicator in choosing a stock even though we know past performance is not necessarily indicative of future results.  What we need to look for is anything that has changed to either improve or undermine the value of the company going forward.  The past is what we know, but the future is what will really dictate the company’s future and ultimately the stock’s price.  This is where earnings reports on companies come to play.

Large companies often have market analysts that follow and thoroughly study their operations for keys to the future. They will derive estimated earnings reports based on that study.  Wall Street takes the reports and averages the analysts’ predictions.  The high/low estimates also accompany the average estimate. The closer the high and low estimates, the more confident you can be about the average…Typically! The key to remember is that the focus will be on operating earnings and “special” changes are excluded.

Analysts will look at the top line and bottom line growth of the company.  Top line refers to the gross revenue of the company.  The bottom-line, refers to the net income.  This makes sense as the bottom line of an income statement is the net income, and the top starts with the gross revenue.

The estimated earnings help to determine a forward looking P/E ratio.  The P/E ratio is just one aspect of a stock. Simply put it is the current stock price (P) divided by the earnings per share (E). Earnings per share is the net income of a company divided by their shares outstanding.  Earnings per share looks at the amount of money leftover for shareholders- after taxes. We can then take the P/E estimate and compare it to other companies and the market as a whole.  Thus, the estimates are critical for individuals who follow this methodology. This does not mean that a stock with a high P/E ratio is not a good buy or that you must buy a stock with a low P/E ratio immediately

While future earnings predictions can be helpful in choosing your investments it is only one part.  No one can predict the future correctly 100 percent of the time including professionals!  If a company that has had solid growth the last five years, has positive estimated earnings, then it might be a good buy.  That said remember our investment creed: In this market and economy the ability to react to what actually happens is more important than the ability to predict what might happen.