Why are Earnings Announcements so Important?

Halal Investment Series Part 11

An earnings announcement is a formal public statement of a company’s profitability for a given time period; usually a quarter or a year. During earnings season, earnings announcements take place on a specific date and are preceded by earnings estimates issued by equity analysts. If a company has been profitable prior to the announcement, its share price will usually rise up to and slightly after the announcement. Because earnings announcements can have such a significant impact on the market, they are frequently taken into account when predicting the next day’s open.

Estimates are arguably the most important input for analysts valuing a company’s future earnings per share (EPS). Analysts estimate EPS using forecasting models, management guidance, and other fundamental information about a company. They may, for example, employ a discounted cash flow model, or DCF (Discounted Cash Flow).


If a company’s profit results fall short of expectations, it may create a buying opportunity for the company. Just because investors decide to sell shares following an earnings disappointment does not mean the stock is not a good long-term investment. If a one-time event, such as a natural disaster that disrupted the normal business cycle, hurt profits in a quarter, financial results may suffer in the short term. However, as long as the company’s fundamentals and market outlook remain strong, the stock price should rise in the long run.

Cashing out

When a company’s quarterly earnings announcement exceeds expectations by a wide margin, there is often euphoria surrounding its shares. When the stock price skyrockets, investors in the company may decide to sell some of their shares in order to maximize profits. The reasoning could be that after the stock rises in response to earnings, it does not have much more room or reason to rise, at least in the near future.

On the Musaffa platform, you can view past and future (estimated) earnings to make an informed decision on what to invest in.

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