EARNINGS

Earning is synonymous with net income, or profit. Earnings are simply telling us what sums of funds are left over from companies’ revenues once cost of goods and expenses are subtracted. As an index trader, getting early and accurate earnings results and seeing their impact on the stock is a great way to get edge above other traders. Within the earning section we have three different ways of issuing earnings reports:

• Earnings Before Taxes (EBT) – Financial measure, revenue less cost of goods sold and selling, general, and administrative expenses.
• Earnings Before Interest and Taxes (EBIT) – Like EBT, but operating and non-operating profit before the deduction of income taxes and interest.
• Earnings Before Interest and Taxes before depreciation, and amortization (EBITDA) – Like EBT, but operating and non-operating profit before the deduction of interest and income taxes. Depreciation and amortization expenses and not included in the costs.

EARNINGS PER SHARE (EPS)

EPS indicates the profitability of a company and can be both a positive or negative figure dependant on whether a company is making profits, or losses. The higher the EPS the better a company is performing:

EPS = Company Earnings / Outstanding Shares

PRICE EARNINGS RATIO (P/E)

Valuation ratio of a company’s current share price compared to its per-share earnings. It is basically telling you how much you are paying for a share compared to profit:

P/E Ratio = Present Market Value / Earnings per Share

Trailing P/E – EPS is usually from the last four quarters. Projected P/E – Estimates of earnings expected in the next four quarters.

The higher the P/E ratio the more the market is willing to pay for each pound of annual earnings. Sometimes it is referred to as the ‘Multiple’. The P/E ratio is only useful for comparing companies within the same industry i.e. banking, tech stocks etc.

DIVIDENDS

Every so often, both regularly and on the spur of the moment, companies will announce that they are going to pay dividends. When a company pays a dividend to its investors, the company is moving cash from the company books into its investor’s bank accounts, thus making the company less valuable in absolute cash terms. When the dividend is paid, the values of a company’s shares are reduced.

Usually the dividend announcement process is a very organized and precisely scheduled event that begins with the simple announcement that a certain company will announce their dividend payment schedule on a certain date. Below you will find a typical schedule:

1. Company says we will be announcing our dividend payment on a day in the future. This future day is known as the Dividend Day.
2. Recording day: at some point before the dividend day a company will have the recording day. The recording day is the day by which time an investor must own the stock to be eligible for the dividend.
3. On dividend day, the company announces how much of a dividend they will pay and on what day they will pay it. All investors who were holding the stock before the record date will receive the dividend. On dividend day, the stock usually goes down by some amount corresponding with the size of the dividend to be paid. For example, if a stock is worth $10 per share and the company says we will pay a dividend of $1 per share, the value of the stock will usually be reduced by around $1.
4. Payment day is the actual day when the dividend is paid. Some indices include dividends in the calculation of the index price some do not. Those indices that do not include dividends are called performance indices.

COMMODITIES AND CURRENCIES IMPACT ON STOCKS

In a trader’s search for edge in trading stock indicies, the price of certain commodities and currencies will affect different indicies in different ways. Some smaller indicies such as the Scandinavian markets keep a close eye on the price of timber. The price of coffee will move the markets in many developing nations. But for most industrialized nations, the most important commodity to watch is crude oil.

Most major currencies affect their local markets in different ways. The euro, the US dollar, the Chinese Yuan, the Japanese yen, the Swiss franc, and the British pound sterling all impact Stock Indicies. One of the most significant single price moves in the equity Indicies was caused by the devaluation of the Chinese Yuan.