Why Do Analysts Compute Earnings Estimates?

Earnings are basically the fiscal net profits of a company. In financial accounting terminology earnings are also referred to as EBIT or EBT. Generally, for an analysis of certain aspects of internal operations of a company many more specific terms such as gross profit are also used. The term ‘Ebit’ is derived from ‘earnings’, while ‘EBITDA’ is derived from ‘earnings per share’. These two terms mean the overall profit that the company makes from its business activities in a year.

There are two categories of company’s: one that generates net income and one that produces gross income. Companies with net incomes mainly distribute their earnings to their shareholders who in turn enjoy the benefit by the reduced taxes. The companies that generate gross income, on the other hand, usually pass all of their earnings directly to the government through taxation. Some countries do not allow direct distribution of earnings, but allow the companies to be tax sheltered, which means they enjoy a lower tax rate on the companies’ distributions. The tax shelter in question here refers to the amount of taxes that are saved on the company distributions, and thus allows the company to reduce its taxable profits.

Analysts, then, use a combination of financial reports and data along with estimates of internal processes and techniques in order to calculate earnings. To calculate earnings estimates, analysts use the information provided and the data they have, and make their estimates based on the information they have gathered. Other analysts may also use estimates from the company in order to come up with a narrower scope and therefore more accurate estimates; however, analysts should exercise caution when coming up with estimates as these estimates are merely opinions and estimates. Investors can also use certain techniques in order to determine the scope and accuracy of earnings estimates. However, it is important to remember that the estimates are only estimates; actual earnings can vary from estimates made by analysts and other investors, and a good analyst will know when an estimate is too low or too high, especially if they have access to the inner workings of the company.