Calculating an Earnings Estimate

Analysts each have their own models for calculating the earnings estimate of a company. Analysts create this information in order to recommend securities for purchase. They weigh different statistics in a unique manner, but all use some common denominators.

#1 Prior Performance

All analysts will look at the past performance of a company for indications of its future earnings. In particular, they will note swings in the price point of the company's stock that may indicate it is approaching a minimum or maximum value. They may also consider things like interest coverage ratio and outstanding stock options.

#2 Current Management

The analyst will consider the current state of the company's key leadership as an indicator of future performance. If management has remained consistent, most will anticipate earnings will continue in a consistent pattern. A high turnover in management will require a closer evaluation. Some analysts will research the new board members or "C-level" executives to find key insights into the changes they may bring.

#3 Company Information

Key company information is always used to determine earnings estimates. For example, financial reports provide the company's earnings to debt ratio, profit to debt ratio and outstanding lawsuits or information that may affect the company's performance in the immediate future.

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