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In general, as I am sure you know, good earnings (especially year after year) are a blessing for a company's stock, as more investors would want to own shares in the prospering company. Poor earnings, on the other hand, damage a company's stock. Investors always eagerly await earnings announcements and pre-announcements to make their investing decisions, and market reaction to earnings releases is generally swift. Companies with consistently good earnings are always sought after by the investors, and thus their stocks have been consistent winners. Others with bad earnings are quickly punished by investors who abandon their shares in search of greener pastures. But what exactly constitutes good or bad earnings?

Earnings are in fact relative. Investors may have a certain value in mind beforehand, to which a company's earnings are compared. But in order to arrive at this value, many aspects of the company's operation must be considered: its operating environment, historical data, current initiatives, sector strength, and many other factors must be used to arrive at a fair number. Who has time to do all that? Financial institutions, research companies, and their analysts do. That is what they are there for. Every day financial analysts pore over and digest huge amounts of data from a company to arrive at a fair value. Many times they meet with the company's executives, vendors, and clients, look at the company's inventory levels, balance sheets (payables and receivables), payroll, and much more to gauge the company's potential earnings.

The result of all this work is quarterly and annual forecasts known as the earnings estimates, expressed in EPS (Earnings Per Share).We will cover EPS later on but for now consider estimate EPS as a forecasted profit number a company is expected to deliver. Many investors, of course, use these estimates to make investment decisions on companies. One problem is that each analyst doing his own research may arrive at …