What are consensus earnings?

Consensus earnings is a fancy word that bankers and investors use. It means the average of many guesses about how much money a company will make. These guesses are made by people called financial analysts who study the company.

What are Earnings?

Before discussing consensus earnings, let’s chat about regular earnings first. Earnings is just another word for profit. Profit is the money a company has left after it pays all its bills.

Let’s say you have a lemonade stand. You buy lemons, sugar, and cups and make lemonade. Then, you sell the lemonade to your customers. The money you get from selling the lemonade is called revenue.

But hold on, you had to spend money to buy the lemons and sugar and cups, right? That money you spend is called expenses. If you take your revenue and subtract your expenses, what’s left over is your earnings or profit. That’s your money to keep. Good job!

Big companies work the same way. Instead of lemonade, they sell cars, clothes, computers, hamburgers – all kinds of things. And their expenses are much more significant – they must pay workers, buy equipment, pay rent, and more.

What do Analysts Do?

Now, let’s talk about those financial analysts. Their job is to study a company and guess how much profit the company will make in the future.

Imagine you have a friend named Jimmy. Jimmy is good at guessing how many jelly beans are in a jar. Now imagine a bunch of people like Jimmy, except instead of guessing jelly beans, they’re guessing how much money a company will make. Those people are like financial analysts.

Analysts look at a lot of things to make their guesses. They look at how much money the company made in the past. They look at how many things the company is selling. They also look at the big picture – is the economy doing well? Are people spending money? All of these things can affect a company’s earnings.

Consensus Earnings

Now, let’s put it all together. Remember, consensus just means average. So, consensus earnings is the average of all the analysts’ guesses about a company’s future earnings.

Let’s go back to the jelly bean example. Suppose we have five people like Jimmy, guessing how many jelly beans are in a jar. Their guesses are 100, 120, 110, 90, and 130.

If we take the average of those guesses (add them up and divide by five), we get 110. That average is like the consensus earnings. It’s the average of all the analysts’ guesses.

Why Does Consensus Earnings Matter?

You might be wondering why people care about consensus earnings. Why not just wait and see how much money the company makes?

Well, remember that the stock market is all about buying and selling shares of companies. And the price of those shares goes up and down based on what people think the company is worth.

If analysts guess that a company will make a lot of profit in the future, people might want to buy shares. They think the company will be successful and make money. So, if a lot of people want to buy shares, the price of the shares goes up.

On the other hand, if analysts guess that a company won’t make much profit, people might not want to buy shares or even want to sell their shares. S,o the price of the shares would go down.

What Happens When Earnings Are Announced?

Companies usually announce their actual earnings every three months. This is a big day for the company and for people who own shares in that company.

Before the announcement, everyone is looking at the consensus earnings – the average of what all the analysts guessed. Then the company announces their actual earnings.

If the actual earnings are higher than the consensus earnings, that’s usually good news! It means the company made more money than analysts thought it would. The company’s shares might go up in price.

But if the actual earnings are lower than the consensus earnings, that’s usually bad news. It means the company didn’t make as much as analysts thought. The company’s shares might go down in price.

The Limitations of Consensus Earnings

As much as analysts try, consensus earnings are still just a guess. Lots of things can happen that analysts can’t predict.

Think about it like the weather forecast. The weatherman looks at all the information and makes his best guess about whether it will rain tomorrow. But he can still be wrong. A surprise storm might come, or the rain might miss your town entirely.

It’s the same with consensus earnings. Analysts make their best guess based on the information they have. But unexpected things can happen to a company. They might lose a big customer, or a new competitor might show up. Good things can happen, too – they might invent a new product everyone loves.

These surprises can make the actual earnings very different from the consensus earnings. That’s why it’s important to remember that consensus earnings are a helpful guide, but they’re imperfect.

The Big Picture

In the end, consensus earnings are just one piece of the big puzzle: a company’s financial health. Investors look at many things when deciding whether to buy or sell shares of a company.

They look at the company’s products, leadership, competition, and overall economy. Consensus earnings are important, but they’re not the only thing.

It’s like when you decide whether you like a song. You might consider the beat, the lyrics, and the singer’s voice. But you also think about how the song makes you feel, what memories it brings up, and whether your friends like it. All of these things together help you decide if it’s a good song.

For companies and investors, consensus earnings are like the song’s beat. It’s an essential part of the song, but it’s not the whole song. And just like different people can like other songs, different investors can have different opinions about a company, even if they’re looking at the same consensus earnings.

Summary

So, let’s sum it all up. Consensus earnings is the average of all analysts’ guesses about how much money a company will make in the future. These guesses are based on much information, like the company’s past earnings, current sales, and the overall economy.

Consensus earnings matter because they affect how people feel about a company and how much they’re willing to pay for shares of that company. But they’re imperfect because unexpected things can make the actual earnings different from the consensus earnings.

In the end, consensus earnings are just one part of the big picture of a company’s financial health. But they’re an essential part and worth paying attention to if you’re interested in business and investing.

Glossary

• Earnings: The money a company makes after paying its expenses. Also called profit.
• Revenue: The total money a company gets from selling its products or services.
• Expenses: The money a company spends to run its business, like paying workers and buying supplies.
• Financial Analyst: A person whose job is to study companies and guess how much money they will make.
• Stock: A small piece of ownership in a company. It’s also called a share.
• Stock Market: A place where people buy and sell stocks.