Earnings week explained: What "beat", "miss" and "guidance" actually mean

All week you'll see headlines saying a company "beat" or "missed." It sounds like a report card. It's closer to a test against expectations, and once you see how that works, a lot of confusing price moves start to make sense.

What does it mean when a company beats earnings?

A company "beats" earnings when the profit or revenue it reports comes in above the average forecast from the analysts who follow it. A "miss" means it came in below. It's a comparison with expectations, not a verdict on whether the business is healthy.

Why this week is busy?

Every three months, US public companies report how their last quarter went. Late October is one of the busiest stretches of the year for these third-quarter (Q3) reports. See companies reporting this week 19 - 23 october . The Federal Reserve's next rate decision is on Wed Oct 28.

The three numbers to watch in an earnings report

1. Revenue: the money a company brought in from sales.
2. Earnings per share (EPS): profit divided by the number of shares. Many companies also report an "adjusted" EPS that leaves out some one-off items, and the report spells out what was left out.
3. Guidance: the company's own forecast for the next quarter or year. Not every company gives one.

Earnings beat vs. miss: it's about expectations

Before a report, analysts publish their estimates. The average is called the consensus. Beat means above it. Miss means below it.

That's why a beat isn't a grade. A company can grow and still miss if people expected more. It can shrink and still beat if expectations were low enough.

What is earnings guidance, and why does it move stocks?

By the time a quarter is reported, it's history. Guidance is about what comes next, so it can move a stock more than the results themselves.

Here's one from earlier this month. On Oct 9, a major US airline reported adjusted EPS of $1.72, below the $1.81 analysts expected. It also cut its full-year outlook to $5.10–$5.60 a share, from $6.50–$7.50, as its fuel costs rose 62%.

Why do stocks fall after beating earnings?

Prices already reflect what investors expect. If a beat was smaller than hoped, or the guidance came in light, the stock can drop the same day. It works the other way too. Big one-day swings around reports are common, and they usually say more about expectations than about the company's long-term story.

What it means if you invest for the long term

• One report is one data point, for one company.
• One company's news isn't the whole market. That's one reason some investors use ETFs to spread money across many companies (see Vantar’s guide on stocks vs. ETFs ). Diversification doesn't guarantee a profit or protect against a loss.
• You don't have to react to every headline. Companies post their reports and guidance on their investor-relations pages if you want the source.

We don't predict who will beat or miss, and nothing here is a recommendation to buy or sell any security. Get more markets breakdowns from Vantar

Earnings season: common questions

What's the difference between EPS and adjusted EPS? EPS uses the company's reported profit. Adjusted EPS leaves out items the company treats as one-offs. The report lists what was excluded, so you can compare the two.

Do all companies give guidance? No. Some give a yearly or quarterly forecast; others don't give one at all.

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