Earnings announcements by companies are closely followed by, and frequently resu

Question

Earnings announcements by companies are closely followed by, and frequently result in, share price revisions. This raises two issues. First, earnings announcements are “ history” – that is, they reflect information on a past period. If the market values stocks based on expectations of the future, why are numbers summarizing past performance relevant? Second, these announcements revolve around accounting earnings. We know that such earnings may have little to do with cash flow. So, again, why are earnings announcements relevant?

Explanation / Answer

Answer: Because These earning announcements show past sales and costs and give information helping to forecast projectedgrowth rates and cash flows. Lower past sales figures would result in lower projected growth rates and cash flows, while higher past sales figures would result in higher projected growth rates and cash flows.

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